In the last several posts, I introduced some different methods for channel strategies including Percentile Channels. A simple way to potentially improve (or at least take a different approach) to a donchian channel strategy is to use a different price input to generate trading signals. As stated in Error-Adjusted Momentum Redux, using any type of risk adjustment tends to improve performance by reducing some of the noise. That is easy to apply when using returns, but how do we apply this concept to a price-based strategy? Actually it is quite simple: using a fixed target percentage- say 1%- you multiply all returns since inception by the target divided by some lag of standard deviation. Then you create an index of those returns which becomes the new price series (being careful to avoid any lookahead bias). This volatility-adjusted index is what generates the signals for your channel strategy instead of the traditional price history. Of course in backtesting, you receive returns on the actual price history and not on the volatility-adjusted index. As a final point of clarification, you are not changing your position size as a function of volatility, instead you are just changing the input price.
Donchian Channel Strategy Pdf Download
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