Rule of 4 weeks trading
Why you need a trend (when trading)
Full-Time Derivative Trader. Trading the markets since The 4 week rule is used primarily for futures trading but might also work in your stock trading system. The Turtles used the same strategy in the eighties.
Donchian's strategy was to "buy when a stock made a 4 week new high" and his exit rule was " sell when it makes a two week low". This system is simplicity at its best: 1 Cover short positions and buy long whenever the price exceeds highs of the four preceding full calendar weeks. The four week rule has proved to be an effective building block on which many successful trading systems are based.
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It's based on the following assumptions about market behavior: 1. The strongest trending moves start from new market highs NOT market lows.
Although it is likely that some of these have validity and can help traders, many of them cannot prove their efficacy or viability in the long term. This article will look into a relatively well know and often mentioned strategy called the Four Week Rule. What is the Four Week Rule?
Those people who think buy low sell high is a great way to make money are wrong. If you don't buy breakouts from new highs, you will miss some of the best trends — period.
A trend in motion is more likely to continue than reverse. We all know this is a basic building block of technical analysis rule of 4 weeks trading there is no better trend than one that is making new highs 3.
A four week cycle is the dominant cycle in trading. This can vary at times of course but the four week cycle is highly effective.
Something to add to your trading arsenal
The original rules were used for trading commodities and can be summarized by: Cover short positions and buy long whenever the price exceeds the highs of the previous 4 calendar weeks. Liquidate long positions and sell short whenever the price falls below the lows of the previous 4 calendar weeks.
The original system being devised for commodities was designed to use a stop and reverse so the trader was always in the market with a position.
Incorrect recognition or interpretation of trends can have a devastating effect on traders. Like a slow moving trading, the equity can be easily depleted without knowing what happened until the last dollar disappears from your trading capital. Trends, however seem to carry an element of subjectivity and are well represented by the many confusing articles that seem to claim to be the authority on trends.
In a non trading market it can get whipsawed a solution to this problem is to enter on the 4 week rule the rule of 4 weeks tradingand to exit on a shorter time period such as 1 or 2 weeks. With this system, a four week "breakout" would be needed to initiate a new position, but a one or two week signal in the opposite direction would mean liquidation of the position.
The trader then remains out of the market until the next new four week breakout is registered. Why It Works This system is based on sound technical principles with signals that are mechanical and clear-cut. It is trend-following so a trader is virtually guaranteed to be on the right side of every trend.
What is the Four Week Rule?
It also follows the often quoted trading wisdom — "let profits run, while cutting losses short". Another advantage is fewer trades, which means less time being spent looking at the market and finally you don't even need a computer! Don't be fooled by simplicity it can be very profitable.
Being a trend-following system, it is not going to catch market tops and bottoms but how many systems do that though? The Proof You might be saying that won't work — well go and try it on a strong trending currency market like the euro, Canadian dollar or Australian dollar and back test it and in a number of strong trending markets and you will see it does.
Don't be led to believe that if its simple it won't work — all the best forex trading systems are simple. You don't get paid for being clever you get paid for being right — Period.
Today, traders always like to trade something different or obscure but if you want a simple system, by a trading legend, that's hard to beat — try Richard Donchian 4 week rule It's been part of some of the true great traders box of tools and should be in yours to. Source: www.