Richard Doncian’s 4-week theory is a time-tested strategy used by most professional traders. Although I prefer to use automated trading software, 4-week theory is one of those non-automated strategies I use for stable profits.
After 30 years it is still strong
Doncian’s 4-week theory is a proven strategy that has been around for over 30 years. Because of its simplicity, many traders ignore it because they don’t believe it can be profitable. The reality of this is that the week 4 rule has been making money since it was first introduced to the commodity market over 30 years ago, and it still brings huge profits. This theory works well in any market type, forex market, stocks or commodities.
How does it work?
Doncian’s theory contradicts what most traders consider the main rule of trading is “buy low and sell high.” While it is true that if you can identify the highest selling point and the lowest buying point, you will make a profit, the reality is that these points can be avoided by even the most experienced traders. Doncian’s theory uses the rule of week 4 to determine when to engage in trading. Just going long when the value of a biased currency pair exceeds all highs in the last 4 weeks, and conversely decreases when the currency pair falls below all lows in the last 4 weeks. If you learn how to apply this theory, you will NEVER miss any of the important trends that continue for weeks or months again.
Why does it work?
The Donchian 4 week rule is a simple price action strategy that is based on a breakout methodology. If you look at the currency pair charts, you will see that long trends can last for weeks, months or even a year or more. Upon closer inspection, it is clear how these trends begin and continue, constantly breaking through to new highs when the market is bullish, or to new lows when the market is bearish.
The methodology is really solid. Because it is only interested in 4-week highs and lows, the system will capture and contain long-term trends. In terms of making money, long-term trends are constantly making big profits. The Forex market is no exception when applying the 4 week rule and is very profitable in the long run.
One of the disadvantages of Donchi’s theory is that it does not work in markets that are sideways or consolidating. As a matter of fact, in the side markets the rule of week 4 is to lose money. The way to prevent these losses is to trade in uncorrelated markets using this rule.
The 4 week rule creates trades when most expect the opposite. While this may sound bad, in reality it is not. Keep in mind that 95% of Forex traders lose money, so disagreeing with most is probably a good indication of good trading. To date, I have not seen any automated system based on Richard Doncian’s theory, and because it is simple in its simplicity and has proven stable profits, you should include it in your trading toolkit.