The 20-day breakout is the simplest form of trend following, and the Donchian channel breakout strategy is its best-known version. A Donchian channel draws two lines on a chart: the highest high and the lowest low of the last n sessions. When the price closes above the upper line, the stock has made a new 20-day high and the strategy buys. It then holds, with no target, until the price closes below the lowest low of the previous 10 sessions.
Richard Donchian, an early pioneer of systematic trend following, popularised a four-week version of the rule. It became widely known through the Turtle traders, a group that Richard Dennis and William Eckhardt recruited and trained in 1983 and 1984. Their System 1 bought 20-day breakouts and exited on 10-day lows, and Curtis Faith, one of the Turtles, later set out the rules in Way of the Turtle.
The reasoning is that a stock breaking to a new high is more likely to be in, or starting, a trend, and that trends tend to last longer than most traders expect. The rule makes no attempt to pick which breakouts will work. It takes them all, keeps each loss small with a volatility-based stop and lets the few large trends pay for the many small losses. The result therefore depends almost entirely on following the rules through long dry spells.
The exact rules
These are the rules the 20-Day Breakout preset runs in Clear Tape, checked on daily bars after each close. This page and the software read the same rulebook, so they always agree.
Entry
- The close is above the highest high of the previous 20 sessions (today not included). Buy at that close.
Stop
- Entry − 2 × ATR(20), set on the entry day and not moved.
Exit
- A close below the lowest low of the previous 10 sessions (today not included); sell at that close.
Target
- None of its own. The target shown is 2R (twice the entry-to-stop distance above the entry), for reference only; the trade is not closed there.
Parameters
| Parameter | Value |
|---|---|
| Breakout lookback | 20 sessions |
| Exit lookback | 10 sessions |
| ATR length | 20 |
| Stop distance | 2 × ATR(20) |
| Minimum history | 80 sessions |
Data it needs
- Daily bars (open, high, low, close), split-adjusted: at least 80 sessions, about 4 months.
Where it differs from the published method
- The Turtles bought during the day, the moment price traded above the 20-day high. This end-of-day version waits for a close above it.
- The Turtles' filter that skips a breakout after a winning one is not applied.
Terms used
- n-day high: The highest intraday high of the n sessions before today. Today is left out, so a close above it is a breakout to a new n-day high.
- n-day low: The lowest intraday low of the n sessions before today (today left out).
- ATR (average true range): A stock's typical daily move. Each day's true range is the largest of high − low and the distances from the previous close to the high and to the low (so gaps count); ATR(n) averages it Wilder's way (each new day counts 1/n). A stop set in ATRs sits farther away on a jumpy stock.
- R (risk per share): Entry minus stop. A 2R target sits twice that distance above the entry.
Who it suits
Rule followers who keep taking signals through long losing streaks and judge results over dozens of trades, not weeks. One decision a day, after the close.
This strategy suits traders who want completely mechanical rules and can check charts once a day after the close. A few minutes are enough: look for closes above the 20-day high, place the stops, and check open positions against their 10-day lows. Because there is no target, you need to be comfortable watching part of an open profit disappear before the exit fires.
Most trades lose a little or break even, so temperament matters more than skill. Expect many losses of about 1R, often several in a row, and a few winners that make up for them. Signals are relatively frequent, so commissions and slippage add up; run your own numbers in the trading cost calculator before you start.
Strengths
- No large trend is missed: every big advance triggers an entry.
- Losses are capped near 1R by the stop; gains are not capped.
- One of the best-documented effects in finance.
- Fully written rules; an end-of-day routine of minutes a day.
Weaknesses
- Low win rate, roughly 30–45%; most breakouts fail or stall.
- Long losing streaks; equity often sits below a previous high.
- Sideways ranges cause whipsaws and strings of small losses.
- Trailing exits give back part of every gain before the trade closes.
Where it struggles: Ranges and whipsaws: often fewer than 40% of trades win, and a few big trends pay for many small losses. Gaps can jump the stop.
Common mistakes
- Skipping signals after a run of losses. The large trend that pays for the losing trades often arrives right after them; taking only the breakouts that feel right breaks the arithmetic the strategy depends on.
- Moving the stop. The stop is set at entry − 2 × ATR(20) on the entry day and stays there. Widening it after the price drops turns a planned 1R loss into a larger one; the ATR stop calculator gives the level before you buy.
- Taking profits early because there is no target. The exit is a close below the 10-day low. Selling at the first gain cuts off exactly the trades that make the strategy work.
- Trading it in a sideways market without regard to the broad trend. In a range, 20-day highs are reached and fail again and again. Expect whipsaws, and consider standing aside or trading smaller when most stocks are not trending.
- Judging it on five or ten trades. With a low win rate, a short sample says almost nothing. Use a backtest and at least 30 live trades, and see how long a losing streak can run with the losing streak calculator.
Worked example
Illustrative numbers only. A stock's highest high over the prior 20 sessions is $50. Today it closes at $50.80, above that level, so the strategy buys at $50.80. Its ATR(20) is $1.50, so the stop is $50.80 − 2 × $1.50 = $47.80, fixed for the life of the trade. Risk per share is $3.00.
With a $25,000 account and 1% risk ($250), the position is $250 ÷ $3.00 ≈ 83 shares, about $4,200; check it in the position size calculator. If the breakout fails and the price falls to $47.80, the loss is about $250, or 1R. If instead the stock trends up to $60 and then turns, the 10-day low rises behind it; when a close at $55.50 falls below a 10-day low of $56, the position is sold at that close for $4.70 a share, about $390 or 1.6R before costs. It gave back $4.50 a share from the peak, which is the normal cost of a trailing exit.
Learn and practise
Academy lessons
- Trend following and breakouts: Breakout entries: channel breakouts and the 52-week high
- Price Action and Wyckoff: Breakouts and false breakouts: trading both outcomes
Calculators and guides
- How to build a trading system
- ATR stops: setting stops by volatility
- ATR stop calculator
- Position size calculator
- Losing streak calculator
- Backtesting: method and common biases
Glossary terms
Using it in Clear Tape
- Free Turn on the 20-Day Breakout preset in Trading systems. The rules are written out in full, and you can build your own systems from them (Free: up to 5 systems and a 50-stock watchlist).
- Tools After every close, 20-Day Breakout screens your watchlist and lists its signals, with the entry, the stop and the target drawn on the chart.
- Free Check against my system: every rule of 20-Day Breakout on any stock's daily bars, the levels it sets and the caveats (earnings close by, thin trading, gaps wider than the stop), with a short AI-written explanation of those facts. One check a day on Free as a trial, 10 on Tools, 30 on Pro.
- Tools Backtest 20-Day Breakout with the holdout test: judged on 2000–2014, then run unchanged from 2015 to now against holding the same stocks, with your own costs and risk per trade (Tools 20 backtests a day, Pro 50). Results are hypothetical: each report discloses costs and survivorship bias, and past results do not predict future ones.
- Free Log the trades in the free trade journal, tagged with the system: R multiples, expectancy and an AI score of how closely each trade followed the plan.
- Pro The AI trading-system coach proposes rules from the way you actually trade (Pro, 5 conversations a month).
For educational purposes only. Not investment advice. Backtest results are hypothetical and do not predict future results.