The Four Week Rule - A Simple One That Gives You Huge Profits Potential
The 4 week rule is one of the simplest technical analysis systems of all time and it may not necessarily be trendy or flavor with the month, with a lot of forex traders who think complicated is most effective - but don't believe that because its simple it doesn't work - it can do.
Richard Donchian was a true legend and just about the most influential trend followers of all time he spoke and wrote profusely about trading and has influenced some of the greatest names in trading including trading legend Richard Dennis.
The four week rule has became an effective building block on which many successful trading solutions are based.
It's based on the following assumptions about sector behavior:
1. The strongest trending moves begin as new market highs NOT NECESSARILY market lows.
Those people who imagine buy low sell high is a great way to make money are mistaken. If you don't shop for breakouts from new altitudes, you will miss all very reputable trends - period.
2. A trend in motion is more likely to continue than reverse.
Clothing this is a basic foundation of technical analysis and there is no better trend than one that is making new altitudes
3. A four week cycle may be the dominant cycle in dealing.
This can vary at times of course but that four week cycle is highly effective.
The original rules were used for trading commodities and can be summarized by:
Cover short positions and buy long whenever the price exceeds the highs in the previous 4 calendar months.
Liquidate long positions and sell short whenever the price falls below the lows in the previous 4 calendar weeks.
The original system increasingly being devised for commodities was designed to use a stop and reverse therefore, the trader was always in the market with a position.
In the non trading market it may get whipsawed a resolution for this problem is to enter on the 4 week rule (this breakout), and to exit for a shorter time period such as 1 or 2 weeks. With this system, a four week "breakout" is needed to initiate a new position, but a one or two week signal in the opposite direction would mean liquidation of the position.
The trader then remains straight from the market until the following new four week breakout is registered.
Why The idea Works
This system will be based upon sound technical principles with signals that will be mechanical and clear-cut. It is trend-following so a buyer is virtually guaranteed being on the right side of each one trend.
It also follows the often quoted trading wisdom - "let sales run, while cutting failures short". Another advantage is actually fewer trades, which means less moment spent looking at this market and finally you don't even require a computer!
People often say technology helps - but also for many traders its a hindrance they think being clever can certainly make them money, well picture this 95% of traders lost a century ago and the its the identical ratio before yet computers today are more powerful than the one mission control useful to land man on the moon!
Don't be fooled by simplicity it can also be very profitable.
Being a trend-following system, it don't catch market tops together with bottoms (but how many systems do that nevertheless?) however, the 4 week rule works as well as any other trend-following system but with the main benefit of incredible simplicity.
The Resistant
You might be declaring that won't work : well go and do it on a strong trending currency market like the euro, Canadian dollar or Australian dollar and back test it and in lots of strong trending markets and you should see it does.
Don't be led to believe that if its simple it won't work - best wishes forex trading systems are generally simple.
You don't get compensated for being clever the user gets paid for being correct - Period.
Today, traders always like to trade different things or obscure but if you want a simple system, by some sort of trading legend, that's hard to overcom - try Richard Donchian several week rule It's been part of most of the true great traders box of tools and really should be in yours to help.
The Four Week Rule - A Simple One That Gives You Huge Profits Potential