Donchian Channel and Larry Williams Large Trade Index Strategy
Author: ChaoZhang, Date: 2024-04-12 17:27:25Tags:
Overview
This strategy combines three indicators - Donchian Channel, Larry Williams Large Trade Index (LWTI), and Volume Moving Average to generate trading signals. It enters a long position when the price breaks above the upper band of the Donchian Channel, LWTI is green, and volume is greater than the moving average. It enters a short position when the price breaks below the lower band of the Donchian Channel, LWTI is red, and volume is greater than the moving average. The strategy exits positions when the price reaches the stop loss or take profit levels, or when the price returns to the middle band of the Donchian Channel. To prevent repeated entries in the same trend direction, the strategy employs a trade counter that only allows new entries after the price crosses the middle band of the Donchian Channel.
Strategy Principle
- Donchian Channel: A long signal is generated when the price breaks above the upper band, and a short signal is generated when the price breaks below the lower band.
- Larry Williams Large Trade Index: Long positions are only allowed when the LWTI color is green, and short positions are only allowed when it is red.
- Volume: Entries are only allowed when the current volume is greater than the volume moving average.
- Trade Counter: To prevent repeated entries in the same trend direction, new entries are only allowed after the price crosses the middle band of the Donchian Channel.
- Stop Loss and Take Profit: Upon entry, stop loss and take profit distances are calculated based on ATR, with the take profit distance being the stop loss distance multiplied by the risk-reward ratio.
Strategy Advantages
- The combination of multiple indicators to confirm trading signals can effectively filter out false signals and improve signal quality.
- Dynamic stop loss and take profit - Adjusting stop loss and take profit distances based on volatility allows the strategy to better adapt to market changes.
- The trade counter prevents repeated entries in the same trend, controlling trading frequency.
- Risk-reward ratio based take profit - Setting the take profit level based on a predetermined risk-reward ratio allows profit potential to exceed risk.
Strategy Risks
- Parameter risk - Strategy performance is greatly affected by different parameter settings, requiring optimization based on different market characteristics and timeframes.
- Choppy market risk - In choppy market conditions, frequent fluctuations may cause the strategy to enter and exit positions frequently, resulting in poor performance.
- Trend risk - If the trend lacks persistence, frequent entries and exits may occur, leading to increased losses.
- Black swan risk - In extreme market conditions, indicators may fail, resulting in poor strategy performance.
Strategy Optimization Directions
- Optimize parameters for different instruments and timeframes to find the best parameter combinations.
- Add trend filtering conditions, such as using moving averages or momentum indicators, to only enter positions when the trend is clear, reducing the number of trades in choppy environments.
- Consider using range breakout strategies for choppy market conditions.
- Optimize stop loss and take profit logic by introducing trailing stops or other methods.
- For extreme market conditions, consider introducing fixed money management and maximum drawdown limits.
Summary
The Donchian Channel and Larry Williams Large Trade Index strategy is a classic trend-following trading strategy. It captures trend direction using the Donchian Channel, filters signals using LWTI, volume, and other indicators, and employs dynamic stop loss and take profit with strict risk control. Overall, it is a strategy framework with the potential for steady returns. However, it is important to note that the strategy is sensitive to parameters and performs poorly in choppy market conditions. It is recommended for use in trending markets. In practical application, further optimization of parameters and logic based on trading instruments and market characteristics, along with strict money management, is necessary to achieve good and stable returns.
/*backtest
start: 2024-04-04 00:00:00
end: 2024-04-11 00:00:00
period: 1m
basePeriod: 1m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/
// This source code is subject to the terms of the Mozilla Public License 2.0
//at https://mozilla.org/MPL/2.0/
// © DillonGrech
//
//This is a Donchian Channel Trading Strategy which was found through the
//YouTube channel TradingLab.
//
//This Strategy uses the Donchian Channel, Larry Williams Large Trade Index,
//and Volume with Moving Average indicators for long and short trades.
//
//Strategy will enter based off indicator entry conditions and will not
//re-enter a trade until the price crosses through the Donchian Channel
//basis line (to prevent re-entering trades in same trend). Strategy will
//exit at stop loss or take profit, or when price crosses donchian basis.
//
//The strategy has been coded by Dillon Grech as part of his YouTube channel
//and a detailed video can be found on his channel at:
//https://www.youtube.com/c/DillonGrech
//https://www.youtube.com/watch?v=5IFe2Vjf61Y
//Source code and template files can be found on his GitHub at:
//https://github.com/Dillon-Grech
//==============================================================================
//@version=5
strategy("Donchian Channel Strategy [DillonGrech]", overlay=true, margin_long=100, margin_short=100)
//==============================================================================
//DONCHIAN CHANNEL
//==============================================================================
//Allow user to select whether they would like to use indicator
Don_Input = input(true, title='Use Donchian Channel?', group = "Donchian Settings")
//Indicator
don_length = input.int(96, minval = 1, group = "Donchian Settings")
don_lower = ta.lowest(don_length)
don_upper = ta.highest(don_length)
don_basis = math.avg(don_upper, don_lower)
plot(don_basis, "Don Basis", color = #FF6D00)
u = plot(don_upper, "Don Upper", color = #2962FF)
l = plot(don_lower, "Don Lower", color = #2962FF)
fill(u, l, color = color.rgb(33, 150, 243, 95), title = "Background")
//Conditions - Enter trades when there is a cross of price and previous donchian channel value
Ind_1_L = Don_Input == false ? false : ta.crossover(close,don_upper[1])
Ind_1_S = Don_Input == false ? false : ta.crossunder(close,don_lower[1])
//==============================================================================
//LARRY WILLIAMS LARGE TRADE INDEX (LWTI) - LOXX
//==============================================================================
//Allow user to select whether they would like to use indicator
LWTI_Input = input(true, title='Use LWTI?', group = "LWTI Settings")
//Indicator
greencolor = #2DD204
redcolor = #D2042D
variant(type, src, len) =>
sig = 0.0
if type == "SMA"
sig := ta.sma(src, len)
else if type == "EMA"
sig := ta.ema(src, len)
else if type == "WMA"
sig := ta.wma(src, len)
else if type == "RMA"
sig := ta.rma(src, len)
sig
LWTI_per = input.int(25, "Period", group = "LWTI Settings")
LWTI_smthit = input.bool(false, "Smooth LWPI?", group = "LWTI Settings")
LWTI_type = input.string("SMA", "Smoothing Type", options = ["EMA", "WMA", "RMA", "SMA"], group = "LWTI Settings")
LWTI_smthper = input.int(20, "Smoothing Period", group = "LWTI Settings")
LWTI_ma = ta.sma(close - nz(close[LWTI_per]), LWTI_per)
LWTI_atr = ta.atr(LWTI_per)
LWTI_out = LWTI_ma/LWTI_atr * 50 + 50
LWTI_out := LWTI_smthit ? variant(LWTI_type, LWTI_out, LWTI_smthper) : LWTI_out
LWTI_colorout = LWTI_out > 50 ? greencolor : redcolor
//Conditions - Enter on color of indicator
Ind_2_L = LWTI_Input == false ? true : LWTI_colorout == greencolor
Ind_2_S = LWTI_Input == false ? true : LWTI_colorout == redcolor
//==============================================================================
//VOLUME INDICATOR
//==============================================================================
//Allow user to select whether they would like to use indicator
Vol_Input = input(true, title='Use Volume?', group = "Volume Settings")
//Indicator
Vol_Ma_Period = input.int(30,"Volume MA Period", group = "Volume Settings")
Vol_Ma = ta.sma(volume,Vol_Ma_Period)
//Conditions - Enter when volume is greater than moving average
Ind_3_L = Vol_Input == false ? true : volume > Vol_Ma
Ind_3_S = Vol_Input == false ? true : volume > Vol_Ma
//==============================================================================
//DONCHIAN CHANNEL TRADE COUNTER
//==============================================================================
//Stores whether a trade has been taken, and resets when there is a cross of price and donchain basis
Trade_Counter = float(0)
Don_Basis_Cross = ta.cross(don_basis[1], close)
if strategy.position_size!=0
Trade_Counter := 1
else if Don_Basis_Cross
Trade_Counter := 0
else
Trade_Counter := Trade_Counter[1]
Plot_Trade_Counter = input.bool(false, "Plot Trade Position Counter?", group = "Plot Settings")
plotchar(Plot_Trade_Counter and Trade_Counter == 0 ? true : false, color = na, text = '0')
plotchar(Plot_Trade_Counter and Trade_Counter == 1 ? true : false, color = na, text = '1')
//==============================================================================
//ENTRY CONDITIONS
//==============================================================================
entry_long = strategy.position_size<=0 and Ind_1_L and Ind_2_L and Ind_3_L and Trade_Counter[1] == 0
entry_short = strategy.position_size>=0 and Ind_1_S and Ind_2_S and Ind_3_S and Trade_Counter[1] == 0
if(entry_long)
strategy.entry("Long Entry", strategy.long)
if(entry_short)
strategy.entry("Short Entry", strategy.short)
//==============================================================================
// TAKE PROFIT AND STOP LOSS CONDITIONS
//==============================================================================
Stop_Input = input(true, title='Use Stop Loss?', group = "Risk Settings")
Profit_Input = input(true, title='Use Take Profit?', group = "Risk Settings")
Profit_RR = input.float(2.0,"Risk Reward Profit Target", group = "Risk Settings")
//Store Price on new entry signal
Entry_Price = strategy.opentrades.entry_price(strategy.opentrades - 1)
//Store Donchain Channel Basis value on new entry signal
Entry_Don_Basis = float(0.0)
if strategy.position_size == 0 or entry_long or entry_short
Entry_Don_Basis := don_basis
else
Entry_Don_Basis := Entry_Don_Basis[1]
//Get stop loss distance
Stop_Distance = math.abs(Entry_Price - Entry_Don_Basis)*1.02
//For Long Trades, find the stop loss level
Stop_L = float(0.0)
if Stop_Input == true
Stop_L := Entry_Price - Stop_Distance
else
na
//For Long Trades, find the profit level
Profit_L = float(0.0)
if Profit_Input == true
Profit_L := Entry_Price + Stop_Distance*Profit_RR
else
na
//For Short Trades, find the stop loss level
Stop_S = float(0.0)
if Stop_Input == true
Stop_S := Entry_Price + Stop_Distance
else
na
//For Short Trades, find the profit level
Profit_S = float(0.0)
if Profit_Input == true
Profit_S := Entry_Price - Stop_Distance*Profit_RR
else
na
//Plot profit and stop loss levels for long and short trades
plot(strategy.position_size > 0 ? Profit_L : na, color=color.lime, style=plot.style_linebr, linewidth=2)
plot(strategy.position_size > 0 ? Stop_L : na, color=color.red, style=plot.style_linebr, linewidth=2)
plot(strategy.position_size < 0 ? Profit_S : na, color=color.lime, style=plot.style_linebr, linewidth=2)
plot(strategy.position_size < 0 ? Stop_S : na, color=color.red, style=plot.style_linebr, linewidth=2)
//==============================================================================
//EXIT ORDERS
//==============================================================================
//Exit long trades
if Stop_Input
strategy.exit(id = 'Exit Long', from_entry ='Long Entry', comment='Long Stop', stop = Stop_L)
if Profit_Input
strategy.exit(id = 'Exit Long', from_entry ='Long Entry', comment='Long Profit', limit = Profit_L)
//Exit short trades
if Stop_Input
strategy.exit(id = 'Exit Short', from_entry ='Short Entry', comment='Short Stop', stop = Stop_S)
if Profit_Input
strategy.exit(id = 'Exit Short', from_entry ='Short Entry', comment='Short Profit', limit = Profit_S)
//==============================================================================
//CLOSE ORDERS
//==============================================================================
exit_long = close < don_basis
exit_short = close > don_basis
if(exit_long)
strategy.close("Long Entry", comment='Long Close', qty_percent=100)
if(exit_short)
strategy.close("Short Entry", comment='Short Close', qty_percent=100)
More
- Dual Timeframe Momentum Strategy
- MACD BB Breakout Strategy
- Wavetrend Large Amplitude Oversold Rebound Grid Trading Strategy
- MACD Crossover Strategy
- Optimized MACD Trend-Following Strategy with ATR-based Risk Management
- ZeroLag MACD Long Short Strategy
- BBSR Extreme Strategy
- High-Frequency Reversal Trading Strategy Based on Momentum RSI Indicator
- RSI Relative Strength Index Strategy
- Bollinger Bands Breakout Strategy
- SPARK Dynamic Position Sizing and Dual Indicator Trading Strategy
- Moving Average Crossover + MACD Slow Line Momentum Strategy
- Volume-based Dynamic DCA Strategy
- MACD Valley Detector Strategy
- N Bars Breakout Strategy
- Low-Risk Stable Cryptocurrency High-Frequency Trading Strategy Based on RSI and MACD
- Bollinger Bands Stochastic RSI Extreme Signal Strategy
- RSI Dual-Side Trading Strategy
- KRK ADA 1H Stochastic Slow Strategy with More Entries and AI
- Volume MA-based Adaptive Pyramiding Dynamic Stop Loss and Take Profit Trading Strategy