Donchian Four-Week Rule Backtest

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Donchian Four-Week Rule strategy summary

The Donchian Four-Week Rule is a stop-and-reverse trend-following strategy that uses strict 20-day High/Low channel breakouts on SPY to shift between long and short exposure as price moves beyond its recent four-week range.

The active decision is simple: use a prior 20 completed trading-day channel to decide whether SPY should be held long or short. An upside breakout turns the strategy long. A downside breakout turns the strategy short. The test isolates the effect of that systematic stop-and-reverse breakout rule relative to continuous SPY ownership.

What this strategy is not

• Not the Turtle Trading system, which adds separate rules for units, pyramiding, stops, markets, and risk sizing.
• Not a full original futures or commodities replication; this backtest uses SPY as the tradable proxy.
• Not a long-only breakout filter; it is a long-short stop-and-reverse rule after valid breakouts.
• Instead: it is a rules-based SPY proxy test of Donchian’s Four-Week Rule, implemented as a long-short stop-and-reverse breakout strategy.

Report summary

Benchmark summary

The primary benchmark is SPY buy-and-hold. It preserves the traded instrument and broad U.S. equity-index exposure while removing the Donchian breakout signal, stop-and-reverse state changes, and short-side exposure.

This keeps the comparison focused on the tested active decision: whether governing SPY exposure with the Four-Week Rule changed the path versus holding SPY continuously.

For the benchmark-selection framework, see How to Choose the Right Benchmark.

• Primary Benchmark: SPY buy-and-hold.
• Preserves: the traded instrument and broad U.S. equity-index exposure.
• Removes: the Donchian breakout signal, stop-and-reverse state changes, and short-side exposure.
• Excludes: Turtle-system additions, diversified futures exposure, and discretionary trend-following overlays.

Key metrics: 2021–2025 free preview

• The free preview is a recent-window orientation tool, not the complete evidence set.
• A five-year free-preview window can be useful, but it can also overstate or understate the full historical tradeoff.
• The full report expands the scorecard across the complete report window and adds the path-level interpretation behind the headline numbers.

In this five-year free preview, the Donchian Four-Week Rule SPY proxy trailed SPY buy-and-hold on CAGR and ending capital. The strategy had a smaller maximum drawdown than the benchmark, but the recent-window result still shows the core tradeoff: the breakout rule did not keep up with passive SPY compounding.

Further research

• BTS Methodology
• What Makes a Backtest Reliable?
• Why Standardized Backtesting Methodology Matters
• How to Choose the Right Benchmark
• Strategy Library