Many years ago, an old-time commodity trader introduced me to what he called the 4 Week Rule. I was a short-term spot trader, but I kept it in my memory as it can give a clue to what longer-term focused traders might be doing.
In this regard, unlike day traders who need to square up, longer-term traders either buy or sell, longer-term traders do not have to close out positions right away. Longer-term traders remove liquidity from the buy or sell side that does not have to come back into the market right away.
This is why it is important to look at longer-term charts even if you are a short-term trader. Another way is to look at the Four-Week Trading Rule.
What is the Four-Week Trading Rule?
From Investopedia
- The weekly rule system is a trend-following trading system.
- One example of the system is the four-week rule (4WR).
- Traders will buy when prices reach a new four-week high or sell when prices reach a new four-week low.
- The weekly rule trading system was established by Richard Donchian.
Four-week Rule
Trend following is a well-known concept underlying many successful trading systems. Probably the first such system was the weekly rule devised by Richard Donchian. Test results for this system were published as early as 1970, and it was found to be the most profitable system then known.
Donchian was called the “father of modern commodities trading methods,” and was the first to manage a commodities fund that was available to the general public. He is believed to have developed the idea of trend following systems in the 1950s.
The Strategy
The weekly rule, in its simplest form, buys when prices reach a new four-week high and sells when prices reach a new four-week low. A new four-week high means that prices have exceeded the highest level they have reached over the past four weeks. Likewise, a four-week new low means prices are trading lower than they have at any time over the past four weeks. This system is always in the market, long or short. Known simply as the four-week rule (4WR), this is the exact system designed and used by Donchian.
This strategy will consistently be on the right side of all the big moves in a market. However, the strategy also has a low percentage of winning trades. The problem is that most markets trend about a third of the time. In some markets, the 4WR may be right less than 40% of the time. The other trades are usually small losses, which occur while the market consolidates with choppy price action.
Unless you have deep pockets and are willing to have a higher percentage of losers to winners with associated drawdowns, but hit it big when the market goes your way, this is just something to keep an eye on ti see what longer-term traders are positioned and what would reverse those positions.’
What I never got answered is whether the Four Week Rule applies to a rolling 4 week or the prior 4 weeks ranges. It is also not clear whether the price needs to close below or above the 4-week range or just break it. This may be up to the individual trader but I am using the prior 4 weeks and a close below/above the 4-week range.
I can show many examples after the fact but here is one that is currently testing the 4 week low
GBPUSD Weekly Chart March 22, 2024
The 4-week low is 1.2579 ((low so far 1.2575).
This seems like a simplistic approach so I am not sure how many follow it without the use of other technical indicators. In any case, keep it in your memory or on your blotter as a reference to what longer-term traders might be doing.
Jay Meisler, co-founderGlobal-View.com
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