20-day breakout strategy: the rule, the risks and a free backtest

The rule in plain words

• Buy when the closing price is above the highest high of the previous 20 trading days.
• Sell when the closing price falls below the lowest low of the previous 10 trading days.
• Stop-loss: exit if the trade falls 10% from the entry price.
• Position size: risk about 2% of capital on each trade, so a stopped-out trade costs a small, known amount.

Why traders use it

This is a classic trend-following idea, often linked to Donchian channels and the well-known "Turtle" traders of the 1980s. It makes no prediction. It simply joins a move after the price has already shown strength.

The exit is closer than the entry (10 days against 20), so the rule gives back less profit when a trend ends.

Where it goes wrong

• Most breakouts fail. It is normal for this kind of rule to lose on more than half of its trades.
• Profits come from a few large winners. If you skip trades after a losing streak, you may miss the ones that pay.
• False breakouts are common around results and news days.
• In a range-bound market it buys highs and sells lows again and again.

How to read your backtest

• Expect a low win rate. Look at whether the average win is clearly larger than the average loss.
• Look at the longest losing streak and ask whether you would have kept following the rule.
• See how much of the total profit came from the best one or two trades.
• Change the position-size risk from 2% to 1% and watch how the drawdown changes.

Common questions