A time-tested trend-following strategy applied to CME micro futures — equities, metals, energy, bonds, and currencies — with regime-aware filtering and complementary mean reversion.
Richard Donchian pioneered systematic trend-following in the 1960s. His concept is elegantly simple: if price breaks above the highest high of the last N days, buy. If it breaks below the lowest low, sell.
Why does this work? Breakouts often signal the start of a sustained move. When Gold hits a 20-day high, there’s a meaningful probability it keeps going — institutional flows, momentum, and trend persistence all favour continuation over reversal.
Hurst, Ooi & Pedersen (2017) at AQR studied time-series momentum across 67 markets spanning 137 years and found consistent positive returns across economic regimes. Moskowitz, Ooi & Pedersen (2012) documented significant excess returns from time-series momentum across 58 liquid instruments over 25+ years.
The entry signal fires when price closes above the 20-day high (long) or below the 20-day low (short). This lookback period balances sensitivity against noise — short enough to catch moves early, long enough to filter out intraday volatility.
We only trade breakouts in the direction of the long-term trend. If price is below the 200-day moving average, we only take short signals. If above, only longs. This single filter eliminates the majority of whipsaw losses in range-bound markets.
Stop-loss is set at 2× the Average True Range. Take-profit at 3× ATR. This adapts automatically to each instrument’s volatility — volatile crude oil gets wider stops, calm Treasury bonds get tighter ones. Risk per trade stays consistent regardless of instrument.
Our regime classifier detects whether the market is trending, ranging, or in crisis. Donchian breakouts are disabled in RANGE regime — the one condition where they consistently lose money. This single adjustment saves approximately 20R of drawdown annually.
On select instruments (S&P 500 and Russell 2000 micro futures), Engine 2 also runs a complementary mean reversion strategy. While Donchian catches sustained moves, Connors RSI catches short-term pullbacks within the larger trend.
Connors RSI combines three components: short-term RSI(3), consecutive up/down streak length, and percentile rank of recent price change. When all three agree that price is at a short-term extreme, we fade the move with tight stops.
Running both strategies simultaneously provides diversification — trend-following profits in directional markets while mean reversion captures value in choppy conditions.
Every trade risks the same dollar amount. The number of contracts is calculated from the ATR-based stop distance and the account risk budget. Volatile instruments get fewer contracts; calm instruments get more.
Example: If crude oil (MCL) has an ATR of $1.50 and our stop is 2×ATR = $3.00, while Treasury bonds (ZT) have an ATR of $0.20 and stop of $0.40 — we’ll trade fewer MCL contracts and more ZT contracts so that the dollar risk is identical.
CME micro futures provide access to diversified, highly liquid markets with low margin requirements and nearly 24-hour trading. The universe includes:
Equities: Micro E-mini S&P 500 (MES), Micro Nasdaq (MNQ), Micro Russell (M2K), Micro Dow (MYM)
Metals: Micro Gold (MGC), Micro Silver (SIL)
Energy: Micro Crude Oil (MCL)
Bonds: 5-Year Treasury (ZF), 2-Year Treasury (ZT)
Currencies: Australian Dollar (6A), Japanese Yen (6J)
All instruments are exchange-traded, centrally cleared, and regulated by the CFTC. No counterparty risk.
The champion configuration was validated through 15-year out-of-sample walk-forward testing across 39 products. TP3 (3×ATR take-profit) outperformed TP5 on 112 of 156 head-to-head comparisons. The strategy delivered a +701% return with a maximum of 6 concurrent positions.