Trading systems are usually thought of as complex computer programs requiring massive amounts of data to calculate the best entry and exit parameters. But in trading, often the best solution is the simplest. In fact, one of the best known trading systems doesn't even require a computer. Read on as we take a look at the weekly rule system and show you how this simple system can help you profit from a trade.
Key Takeaways
The weekly rule system is a trend-following trading system.
One example of the system is the four-week rule (4WR).
Traders will buy when prices reach a new four-week high or sell when prices reach a new four-week low.
The weekly rule trading system was established by Richard Donchian.
Four-week Rule
Trend following is a well-known concept underlying many successful trading systems. Probably the first such system was the weekly rule devised by Richard Donchian. Test results for this system were published as early as 1970, and it was found to be the most profitable system then known.
Donchian was called the "father of modern commodities trading methods," and was the first to manage a commodities fund that was available to the general public. He is believed to have developed the idea of trend following systems in the 1950s.
The Strategy
The weekly rule, in its simplest form, buys when prices reach a new four-week high and sells when prices reach a new four-week low. A new four-week high means that prices have exceeded the highest level they have reached over the past four weeks. Likewise, a four-week new low means prices are trading lower than they have at any time over the past four weeks. This system is always in the market, long or short. Known simply as the four-week rule (4WR), this is the exact system designed and used by Donchian.
This strategy will consistently be on the right side of all the big moves in a market. However, the strategy also has a low percentage of winning trades. The problem is that most markets trend about a third of the time. In some markets, the 4WR may be right less than 40% of the time. The other trades are usually small losses, which occur while the market consolidates with choppy price action.
Using the Four-Week Rule
As an example of the 4WR, we can look at Google (before it split into different share classes in 2014)in Figure 1. This shows a typical winning long trade. When a new four-week high was reached, GOOG was bought; it was sold about 10 weeks later when it made a new four-week low. The trade resulted in an impressive 18% gain. The problem with this trade is that it was up by more than 30% at one point, and gave back nearly half its profits before giving a sell signal.
The 4WR can work equally well on the short side. In Figure 2, we see a winning trade in Goldman Sachs. This trade also resulted in a win of more than 18%. But it had been ahead as much as 25% and was closed after giving back a significant portion of the profits.
Refining the Strategy
One way to address the problem of staying in a trade too long is to change the exit rules. Instead of following the original 4WR to exit a position, traders can exit when a moving average is broken. For example, applying a 10-day moving average as the exit criteria on the GOOG trade shown in Figure 1 would have increased the profits on that trade by about 25%. A 10-day moving average was selected because it is one-half of the entry signal (four weeks is 20 trading days), but any time period shorter than the entry signal can be used.
Trend Filtering
Another use of the 4WR is as a trend filter on the overall market. For many traders, it can be a challenge to determine whether the market is bullish or bearish on a short-term basis. Applying the 4WR allows traders to objectively define the trend. If the market's most recent signal under this system is a buy, the trader can be confident that the market is in an uptrend. Downtrends can be defined as times when the latest 4WR signal was a sell; in other words, the market has made a new four-week low more recently than it made a new four-week high. Using the 4WR as a filter, the trader would look for the 4WR to be on a buy signal before entering new long positions. Short positions would only be entered when the market is on a 4WR sell signal.
Finding Longer Term Trends
This versatile system can also be applied to identify the longer-term trend. This can be done by applying Dow theory, a widely followed barometer of the health of the market. Analysts look for the action in the Dow Jones Transportation Average to confirm the direction of the Dow Jones Industrial Average. When both averages make new highs, we are in a confirmed bull market. New lows in both averages signal a confirmed bear market. Divergences between the averages lead most analysts to express caution about the trend.
One problem with applying Dow theory is that the rules are subjective, depending on how an analyst defines a new high or new low. It is possible for two skilled practitioners to look at the same charts and disagree on the signals. Applying the 4WR prevents this possibility. Rather than subjectively determining a new high or low, the 4WR defines, in advance, when a signal is generated and all analysts using the 4WR will arrive at the same conclusion.
The Bottom Line
The 4WR makes a great addition to any trader's toolbox. All traders should consider adapting the 4WR to their trading styles. Keep in mind that there is nothing magic about four weeks. Traders may choose to use signals based on shorter or longer timeframes. Entry and exit signals can be asymmetric, for example entering on 4WR signals but exiting on two-week new lows. As noted, moving averages can also be used to generate exit signals. The 4WR can be combined with indicators, such as the relative strength index or moving average convergence divergence, as a filter on these signals. The possible applications of the 4WR are limited only by the trader's imagination, so experiment a little and find out which system produces the best results for you.
One example of the system is the four-week rule (4WR). Traders will buy when prices reach a new four-week high or sell when prices reach a new four-week low. The weekly rule trading system was established by Richard Donchian
Richard Donchian
Donchian channels are a popular technical analysis tool, particularly among commodity traders. The Donchian channel consists of plotting an upper line—the highest security price over a set number of periods—and the lower line indicating the lowest price over the period.
The document discusses the "Four Week Rule" trading system developed by Richard Donchian. The system involves buying when the price exceeds the high of the past four weeks and selling when it falls below the low of the past four weeks. 2.
The 3–5–7 rule in trading is a risk management principle that suggests allocating a certain percentage of your trading capital to different trades based on their risk levels. Here's how it typically works: 3% Rule: This suggests risking no more than 3% of your trading capital on any single trade.
Clear guidelines: The 5-3-1 strategy provides clear and straightforward guidelines for traders. The principles of choosing five currency pairs, developing three trading strategies, and selecting one specific time of day offer a structured approach, reducing ambiguity and enhancing decision-making.
To increase your chances of profitability, you want to trade when you have the potential to make 3 times more than you are risking. If you give yourself a 3:1 reward-to-risk ratio, you have a significantly greater chance of ending up profitable in the long run.
Likewise, a four-week new low means prices are trading lower than they have at any time over the past four weeks. This system is always in the market, long or short.
The fifty percent principle is a rule of thumb that anticipates the size of a technical correction. The fifty percent principle states that when a stock or other asset begins to fall after a period of rapid gains, it will lose at least 50% of its most recent gains before the price begins advancing again.
The 80% Rule is a Market Profile concept and strategy. If the market opens (or moves outside of the value area ) and then moves back into the value area for two consecutive 30-min-bars, then the 80% rule states that there is a high probability of completely filling the value area.
According to this rule, 90% of novice traders will experience significant losses within their first 90 days of trading, ultimately wiping out 90% of their initial capital.
It is not a hard and fast rule, but rather a guideline that has been observed by many traders over the years. The logic behind this rule is that if the market has not reversed by 11 am EST, it is less likely to experience a significant trend reversal during the remainder of the trading day.
One of the ways beginners can implement the most profitable trading strategies effectively is by embracing the buy-and-hold strategy. This involves researching companies with solid fundamentals and stable earnings, then holding their stocks for a long time without being swayed by short-term market fluctuations.
Portfolio management with 70% hedge and 30% spot delivery. Option to leave the trade mandate to the portfolio manager. The portfolio trades include purchasing and selling although with limited trading activity.
The 2% rule in investing suggests that you should never risk more than 2% of your capital on any single trade or investment. This approach helps manage risk by limiting potential losses and preserving capital for future opportunities.
Let profits run and cut losses short Stop losses should never be moved away from the market. Be disciplined with yourself, when your stop loss level is touched, get out. If a trade is proving profitable, don't be afraid to track the market.
Instead of allocating 60% broadly to stocks and 40% to bonds, many professionals now advocate for different weights and diversifying into even greater asset classes.
For example, if you're 30 years old, subtracting your age from 120 gives you 90. Therefore, you would invest 90% of your retirement money in stocks and 10% into more consistent financial instruments. This rule creates a portfolio that gradually carries less risk.
If you make four or more day trades over the course of any five business days, and those trades account for more than 6% of your account activity over the period, your margin account will be flagged as a pattern day trader account.
While the practice is legal, investors who trade the same securities often in a single day are potentially flagged as “pattern day traders" (PDT), which requires adherence to Financial Industry Regulatory Authority (FINRA) requirements.
If your account is flagged for PDT, you're required to have a portfolio value of at least $25,000 to continue day trading. Your portfolio value is the sum of your cash, stocks, and options, and doesn't include crypto positions.
Who Is a Pattern Day Trader? According to FINRA rules, you're considered a pattern day trader if you execute four or more "day trades" within five business days—provided that the number of day trades represents more than 6 percent of your total trades in the margin account for that same five business day period.
Introduction: My name is Carlyn Walter, I am a lively, glamorous, healthy, clean, powerful, calm, combative person who loves writing and wants to share my knowledge and understanding with you.
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