The Best Futures Trading Strategies

This post returns to what I know best; futures trading. I wanted to take a look at some of the most popular futures trading strategies so in this article we’ll examine the Donchian trading strategy.

Recently, I’ve focused on the cryptocurrency trading strategy that I speak about in my regular YouTube videos. It is an automated strategy with an algorithm that enters new trades once a week. It has no leverage, is long only and runs across a portfolio of cryptocurrencies. You can learn more about it here.

That said, my background is primarily futures. Alongside other instruments such as stocks and options, I’ve traded futures for over 20 years. I’ve also got a long-term portfolio of real estate that I manage. But really, futures is what I know the best.

So I thought it’s about time that I did a post specifically for futures traders. Over the coming weeks I’ll cover a number of strategies and as I mentioned, in this post, we’ll look at the Donchian strategy.

Futures Trading Strategies (Donchian Strategy)

If you’re not familiar with it, the Donchian trading strategy is a breakout trend following strategy. When price breaks above or below significant price high or low, the strategy dictates the trader should create a position long or short.

The strategy is very simple concept and its rules have been transfered into an indicator which can be found in most charting packages (both free and paid).

The indicator identifies the point on the chart which if and when the price breaks above that point, the trader must get long. Conversely, it also identifies the point which, if and when the price breaks below that point, the trader will get short.

Breakout, Trend Following Strategy

If the price breaks out above or below these levels, the trader’s objective is to remain with the trade for as long as possible, so the strategy aims to capture mid to longer term trends.

To visualize this on your chart, your charting package will be likely to include the Donchian Channel indicator. Start with the raw price chart of the instrument you’re following, a simple price line, candlestick or barchart all work the same.

Select the Donchian Channel indicator and the package should ask you to input a parameter. This is how many days you want to use as the prerequisite for the breakout, this figure should be based on your backtest. So, if you’re using for example, a 40-day or 100-day parameter for the Donchian Channel, it means when the price breaches either above or below the highest or lowest point in the prior 40 or 100 trading days, that’s basically your signal to enter.

I’ve tried two different ways of trading the Donchian strategy. The first meant that I was ‘always in’ the market. In this version of the strategy, you would always hold a position in the instrument. The second way I’ve tried is with with stop-loss.

Both are a different tactic for how the trader wants to approach the market, the key difference is that the first brings a lot of volatility to the trader’s account while the second manages risk far more effectively.

The entry for either tactic is via a stop order placed above or below the highest or lowest prices for the prior x number of days. These would be stop market orders so, once the price goes through your stop level, it will execute a market order taking you into the market, either long or short.

You can chose to enter using a stop limit order which is triggered when the price meets the stop price but the entry is a limit order. However, as with any limit order, there’s no certainty you will be filled and so there’s a risk you’ll miss the move – this is one reason I don’t use stop limit orders. The other is that they run counter to the general principle behind breakouts.

The intention with all futures trading strategies in particular, the Donchian strategy, is that the trader wants to be buying strength or selling. They want momentum to push the price in the direction of their position. The more convincing the initial thrust, the more likely it is the trade will be profitable. In many ways, the trader ‘wants’ slippage because it means there there are many buyers or sellers trying to enter the market on the break of the key level, at the same time.

Always In

The always in tactic ensures the swing trader always hold a position in the instrument they are trading. Once the initial signal to enter long or short is given, the trader remains in the position until the opposite signal is given. If the trader is long, they will need to offset the long with a sale and then a second sale to take them short. This is reversed for traders who are originally short.

So, with this tactic, there’s only one way to exit the position and that’s to wait until there’s an opposite signal which negate the original premise to be long or short.

Protective Fixed Stop

The other way is to, once you’ve entered the market on the stop, you can attach a stop loss order to the position. And the stop loss order attempts to manage your risk, to limit your risk. And there are various ways of determining your maximum risk.

One of which could be not risking more than 1% of the value of your account.

In this case, assuming your account is $10,000, 1% would be $100. Therefore, when the position moves against you and you see an unrealized loss, once it reaches -$100, the position is stopped.

So, the stop loss is a conditional order. It’s conditional on the order to create a position being filled – you have confirmation from your broker you have bought or sold.

When and if this happens a stop-loss order is generated and is attached to the position. The stop-loss order remains active unless it is manually cancelled by you or you close the position.

If you do nothing and the price continues in your favor, the stop-loss remains in place at the original trigger price you set when the order was created.

Protective Trailing Stop

A slight variation on this fixed stop-loss approach is the trailing stop.

As the name implies, a trailing stop trails the price. It does this only if the price moves up or down in the direction of the trade. A long trade that sees more unrealized gains as the price moves up will see the stop-loss also move up in tandom.

Conversely, o, it’s once you’ve entered the trade, the stop loss is attached to that trade. And it remains there for as long as you’ve… for as long as prices continue in your favor. So, that’s the other way of doing it. And I’m not saying one is better than the other. You have to back test this. Back test it to make kind of sense of what works best for you. So, as I say, this is a price chart of an instrument. It happens to be the corn. I think it’s the corn traded in the Chinese futures exchange. The red line is the upper boundary. And this marks the highest point the price has reached in the prior, in this case, 50 days. So, 50 there represents the parameter that I’ve entered to create this channel. The blue line is the lowest point the price has reached in the prior 50 days. The middle line is exactly that. So, it’s the middle point between the upper and the lower boundary. You can also, I think there are on certain packages, you can make that line the average true range of, for example, the prior 20 days. And that will be roughly the midpoint all the way through the midpoint of the channel. So, what I did was back testers. I’ve done the legwork for you. I back tested the Donchian channel, and I back tested in the QuantConnect platform. It was coded into using Python. It was a very… the Donchian channel is a fairly simple, was quite a simple trading strategy. So, it’s quite simple for me being a non-coder to code up. And I back tested it across 20 futures markets, including FX, financials, metals, some of the softer the grains, the meats and the energies. I used 30 years of data. And one of the good things about the QuantConnect platform is that embedded in the platform is that is access, you’ll get access to previous historical data. And you can do that for free. If you were to buy that historical data, it’s going to cost you some money. particularly with futures it does cost some money. But if you go, if you open up a QuantConnect account, you’ll get access to that same data for free. So, you can test your ideas for free using the QuantConnect platform. And by the way, I’m not affiliated at all to QuantConnect. I just think it’s quite a good platform for new traders to test out their ideas. So, the back test had 30 years of data. It used the breakout 100 trading days. And it’s written there, the Donchian channel is formed by taking the highest point and the lowest point of the last 100 days, 100 periods. The rule is you go long or short on a stock as soon as price closes above or below the lower Donchian band of 100 days. And so, it should be obvious that your entry, you will only get an… you will get a signal to enter, but you can only enter the next trading day. Because if a signal is created on the close and only when the close price closes above or below the channel, you could only enter on the next day, if that makes sense. The rules I programmed in was so I didn’t use a stop, I just exited the trade. I exited and reversed the trade as soon as the price crosses the opposite band. In terms of position sizing, a little bit complicated explained, but I basically use the 4 times the ATR of the prior 10 days to determine the correct position size. So, the results, the results were okay, not mind blowing, but okay. So, Compound Annual Growth Rate of 5.5%, a fairly hefty Drawdown of 25.4%, and a Sharpe ratio of 0.6. So, nothing really earthshattering. But nevertheless, you’re going to be taken into the market when there is a trend. It doesn’t show on here, but the size of your wins to the losses, I think in the region of 321. So, your risk reward ratio is quite high on this strategy. So, I did another variation of the same thing. I changed the position size and I increased… and from that, I was able to increase the Compound Annual Growth Rate to 9.9, which is under 10%. However, I’ve had to accept that there was a Drawdown of 45%, which is a very large figure for this strategy. I’ve got a bit of a cold. I’ve had a bit of a cold. You could probably tell in my voice. And that’s why I keep coughing. So, I do apologize for that. So, it’s not a mind blowing, it’s not a strategy that’s going to give you double-digit returns. But it is a strategy that will keep you in the market while there is a trend. What you can do, and I didn’t do it, is you can try and add a stop and see how that improves the… or reduces your Drawdowns. So, just to round off, QuantConnect platform is what I used. There are alternatives, the Quantiacs, which I have a little bit of experience with. If you don’t have any coding experience, you could go to So, I don’t have any affiliation with any of them. I’m just kind of giving them to you, just so they’re on your radar and you can try it out yourself. Anyway, slightly over what I wanted to do, which is 10 minutes. So, coming up to 14 minutes now. I hope that helps. Good luck with your trading. And I’ll see you in the next video.