ALPN and VRTX may merge surge of bullish momentum LONGAlpine is a biotech stock that had an earnings report beating estimates two weeks ago. It
is now reaching for all-time highs. That said, it is burning cash just slowing down the burn.
Both revenue and earnings showed remarkable improvement as compared with the previous
quarter. The bullish momentum of price and volume is obvious on the weeky chart with
the print of a massive bullish engulfing candle. Another earnings report is
due in 4 weeks. In the meanwhile, the news catalyst is VRTX and ALPN may be merging.
www.tradingview.com /
I will take a risky long trade here with a stop loss at 50 and a profit first target
of 80 and the second at 90.
Donchianchannel
STAA medical suppy small cap catching up from Covid LONGSTAA is a medical company specialized in implantable lenses. Many of those needing
lens replacements for cataracts put things off during the COVID era and eye surgeons are now
catching up on backed up patient loads. Medical insurance companies are burdened with
patients catching up from the covid delays for elective surgeries. The surgeons and medical
supply companies on the other hand are experiencing growth.
Navigating Support and Resistance with Renko ChartsToday we continue our deep dive into support and resistance levels and explore how traders can effectively utilize Renko charts and Donchian channels to identify these price zones. Renko charts, known for their simplicity and ability to filter out market noise, provide a unique perspective on price movement. We'll discuss how Renko charts work and demonstrate their effectiveness in pinpointing support and resistance levels with the help of Donchian channels. Donchian channels are a popular technical analysis tool that maps out the highest highs and lowest lows over a given period.
By combining the insights from Renko charts and Donchian channels, traders gain a comprehensive approach to detecting key support and resistance areas in any market condition. Whether you're a novice trader or an experienced professional, we hope this video aids anyone seeking to enhance their ability to define support and resistance for any asset.
Trailing Stops on AVAX and the Donchian ChannelHere is what a 7.4% Trailing Stop would look like on these AVAX runs. Seems pretty satisfactory, but I guess that is for you to decide!
Why 7.4? Well, the profit takes would be a bitttt better than 7.5 it seems. Play around with it for yourself and see!
This indicator is straight-forward and useful. A great idea. Give thanks to KivancOzbilgic (I cant post links yet! Sorry!)
The blue is NOT Bollinger Bands! It is a Donchian Channel
(The following is ChatGPT because I am lazy:)
Donchian Channels:
Construction: Formed by taking the highest high and the lowest low of the last 'N' periods. The area between the high and the low forms the channel.
Use: Primarily used to identify breakout levels. When the price breaks through the top or bottom of the channel, it may indicate a continuation or reversal of the current trend.
Bollinger Bands:
Construction: Consist of a middle band being a moving average (usually 20-period) and two outer bands at a standard deviation above and below the middle band.
Use: Used to measure market volatility and identify "overbought" or "oversold" conditions. When prices move close to the upper band, the market may be considered overbought, and when they move close to the lower band, it may be considered oversold.
Donchian Channel IndicatorThe Donchian Channel indicator is a powerful tool that’s been employed by traders around the globe for decades. What does it stand for, and how do traders use it? In this guide, we’ll break down the components of Donchian Channels, how to interpret them, and offer a sample strategy that you can get started with right away.
What Is the Donchian Channel Indicator?
The Donchian Channel indicator, also known as the DC indicator, is a technical analysis tool developed in the 1960s by Richard Donchian, a pioneer of modern trend-following strategies. It’s used to identify the current market trend and to determine potential buy and sell signals.
The Donchian Channel is a close relative of the Bollinger Bands and Keltner Channel volatility-based indicators. Like these two indicators, it features three lines: an upper boundary, a lower boundary, and a midpoint line. However, unlike Bollinger Bands and Keltner Channels, which are based on standard deviations and average true range (ATR), respectively, the Channels are based only on the highest and lowest prices over a specified period.
Donchian Channels Formula and Settings
Donchian Channels are plotted using the high and low prices of an asset over N periods. The formula for Donchian Channels is relatively easy to understand. It follows:
- Upper Boundary: The highest high over N periods
- Lower Boundary: The lowest low over N periods
- Middle Line: (Upper Boundary price + Lower Boundary price)/2
Here, N can be adjusted to suit the trader’s preferred Donchian Channel settings. By default, N is usually set to 20 periods. A lower number will increase the responsiveness of the Channels but may also produce more false signals and create more noise, which can cause confusion. In contrast, a higher number will supply fewer signals overall but can boost the accuracy of the ones it does provide. For the sake of simplicity, we’ll use 20 periods throughout the rest of this article.
Donchian Channels are a versatile tool that can help traders gauge the strength of breakouts and identify potential reversal points, but their best use is in spotting emerging trends. While the indicator shouldn’t be used in isolation, it can be an effective addition to a trader’s arsenal when used alongside other tools, like oscillators and volume indicators.
How to Interpret Donchian Channels
Like the previously mentioned Bollinger Bands and Keltner Channels indicators, Donchian Channels are a measure of volatility. When volatility is high, the highest highs and lowest lows over the past N periods are likely to be more extreme. This is represented by a widening Donchian Channel. Similarly, when volatility is low during consolidation phases, the Channel will become narrower.
Trends
To determine a trend using Donchian Channels, traders will look at the slope of the upper and lower bounds. When the upper bound is consistently moving higher while the lower bound stays flat, it’s a signal that bullish momentum is entering the market. A lower bound that moves down while the upper bound stays flat is indicative of bearish momentum.
This is because, when a trend is strong, prices will continually make higher highs or lower lows, exceeding that of the last 20 periods. For example, when an asset is bullish and moves to its highest high over the past 20 periods without a lower low, we’ll see the upper bound trend upward while the lower bound temporarily remains flat. This lower bound will also move higher eventually, confirming the bullish trend.
Breakouts
Donchian Channels can be used to trade breakouts. There are two primary signals breakout traders look for: breaks above or below the midpoint line and touches to the upper/lower boundaries. Since the midpoint is effectively a moving average, a price can be considered bullish when it closes above the line and vice versa, offering a signal for breakout traders to potentially enter a trade.
The more effective way to trade breakouts with the Channels is to look for multiple confirmatory touches. Why look for multiple touches? Because it’s not uncommon for prices to make a higher high or lower low before reversing. At least with multiple touches, it confirms that momentum is building in a certain direction.
Reversals
Trading reversals with Donchian Channels is more complex than identifying trends or breakouts, but it is possible. In a ranging market, the upper and lower boundaries can be considered areas of resistance and support, respectively. In this scenario, they’re both likely to be plotted as fairly flat lines, given the absence of a trend in the market.
Therefore, if the price touches the upper boundary, traders can either close long positions or open short ones. If the price is at the lower boundary, traders usually close short positions or open long ones.
Without using the indicator, many traders would already identify the highs and lows of a trading range as potential support/resistance levels. Donchian Channels can help plot these areas visually with little effort and also show traders smaller areas of support or resistance they may have missed.
Using Donchian Channels in a Strategy
Now that we’ve discussed the mechanics behind the Channels and how to interpret them, let’s take a look at how to use the Donchian Channel indicator in a strategy.
If you want to follow along and see how this Donchian trend system works, consider using the free TickTrader platform from FXOpen. There, you’ll find dozens of tools and indicators ready to help you find your edge in the markets.
Step 1: Setup Your Chart
To start, identify the asset you want to trade. This strategy can be applied to almost any asset class you might want to trade, including forex, stocks, and commodities. If you don’t already have a brokerage account, open an FXOpen account to gain access to dozens of tradable instruments in minutes.
Then, you’ll need to choose a timeframe, which can be whichever one you prefer. Finally, add the Donchian Channel indicator to your chart and customise its periods, if desired.
Step 2: Wait for Repeated Touches to the Bands
Now, we wait for the price to trend consistently and make repeated touches to the upper or lower boundary. “Repeated” here is open to interpretation. You could look for two or three consecutive touches or wait for three out of four candles to touch the bound. We’ll use three consecutive touches in this example.
Note that these touches should be in the direction of the larger overall trend. If, for instance, you see the price making a brief move downward in a significant bull trend, then simply look for the price to hug the upper band.
Step 3: Enter on the Pullback to the Midpoint
Once we have a signal, we’ll wait for the price to rise above the midpoint before making our entry. In practice, you’ll need to keep an eye on the charts to watch the middle line as it progresses. You can then choose to set a limit order at the line or enter with a market order once the price retraces.
Step 4: Set Your Stop Loss
Now that we’re in a trade, we just need to set a stop loss. Thankfully, Donchian Channels make this an easy task. Just set your stop above the upper band if the trend is bearish or beneath the lower if the trend is bullish.
Step 5: Trail Your Stop
Given that this is a trend-following strategy, we want to stay in for as long as possible until the trend is exhausted. Your best bet is to move your stop above or below the relevant band once the trend has progressed, either following it closely or using recent significant flat areas.
Where to Go Next
That’s it! You now have a comprehensive overview of Donchian Channels, including how to interpret them and how to apply them to a strategy. Wondering what to do next? You can try one of these:
- Read up on related concepts, like Bollinger Bands and Keltner Channels.
- Explore their effectiveness when combined with other indicators, like the Relative Strength Index (RSI) or Stochastic.
- Backtest a strategy using historical price data and analyse potential entries and exits, logging your results.
- Open an account to try putting the strategy above into practice.
This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
Stop Losses: A Trader's Best DefenseIn a perfect world, every trade would go our way, but alas this is usually not the case. A stop loss is a risk management tool used by traders and investors to minimize their losses when trading. It is a predetermined price level at which a trader's position will automatically exit the market, causing the loss to be realized. Stop losses are crucial to any trading strategy, as they help traders limit their losses and stay disciplined. In this blog, we will look at what stop losses are, why they are important, how to set realistic stop losses, and five different examples of stop losses with a description of how to set the stop loss.
What are Stop Losses?
A stop loss is an order to sell a security when it reaches a particular price. It is a predetermined price level at which a trader's position will automatically exit the market, causing the loss to be realized. This means that if the price of the security falls to the stop loss level, the trader's position is automatically closed, and any losses incurred are limited to that level. Stop losses are essential because they help traders limit their losses and stay disciplined.
Why are Stop Losses Important?
Stop losses are important because they help traders limit their losses and stay disciplined. In trading, it is easy to become emotional and let your losses run. Stop losses help traders avoid this situation by automatically exiting the market when the price reaches a predetermined level. This ensures that losses are limited, and traders can move on to the next trade without being emotionally affected by the previous loss.
Setting Realistic Stop Losses
Setting realistic stop losses is crucial to any trading strategy. A trader needs to consider the volatility of the security, the trading style, and the risk-reward ratio when setting stop losses. The stop loss should be set at a level where the loss is acceptable but not too close to the current price level, as this may result in the stop loss being triggered prematurely. A stop loss should also not be set too far away from the current price level, as this may result in the trader losing more than they are willing to risk.
Stop Loss Examples
Below we will list five examples of setting effective stop losses. For consistency, we are going to use the same long stop loss example, but these same examples can be set for stop losses for short positions as well.
Percentage-Based Stop Loss: A percentage-based stop loss is a stop loss that is set at a specific percentage below the purchase price. For example, if a trader wants to place a long at $0.088602 and sets a 0.5% stop loss, the stop loss would be triggered at $0.88160. For a short stop loss at 0.5%, you would add the value instead and have a 0.89035 stop loss. To set a percentage-based stop loss, the trader needs to determine the percentage they are willing to risk and place the stop loss order at that level.
ATR-Based Stop Loss: An ATR-based stop loss is a stop loss that is set based on the average true range of the security. The average true range is a measure of volatility and is calculated by taking the average of the high and low prices for a particular period. To set an ATR-based stop loss, the trader needs to determine the number of ATRs they are willing to risk and place the stop loss order at that level. For a long stop loss, you would subtract the ATR times its multiplier from the current price. For a short-stop loss, you would add the ATR times its multiplier to the current price. The unique upside to this stop-loss style is the ATR accounts for market volatility which can aid your risk management and help set more appropriate stop losses.
Using Moving Averages or Super Trend: Moving averages and super trend are technical indicators that can be used to set stop losses. Moving averages are calculated by taking the average price over a specific period, while the super trend is a trend-following indicator that uses the average true range to calculate the stop loss level. To set a stop loss using moving averages or super trend, the trader needs to identify the period and place the stop loss order at the appropriate level. The Moving Average or Supertrend can then act as a moving stop loss as it trails the price.
1. Moving Average:
2. SuperTrend:
Donchian Channels: Donchian channels are a technical indicator that can be used to set stop losses. Donchian channels are created by taking the highest high and lowest low over a specific period and plotting them on a chart. To set a stop loss using Donchian channels, the trader needs to identify the period and place the stop loss order at the appropriate level. In the example below we use a more standard 20-period Donchian level to identify areas of lowest low interest that would be a good place for a stop loss. If we were setting a short order we would look to recent highest highs as potential stop-loss areas
Conclusion
Stop losses are crucial to any trading strategy, as they help traders limit their losses and stay disciplined. When setting stop losses, traders need to consider the volatility of the security, the trading style, and the risk-reward ratio. Stop losses can be set using many different techniques, including percentage-based, ATR-based, using moving averages or super trend, and Donchian channels. By setting realistic stop losses, traders can minimize their losses and stay disciplined, which is essential for long-term success in trading.
Choosing Your Channel: Bollinger, Donchian, or Keltner?When it comes to trading financial instruments, traders have a plethora of technical indicators to choose from. Among these, Bollinger Bands, Donchian Channels, and Keltner Channels stand out as popular tools for analyzing price movements and identifying potential trading opportunities. Each of these channels has its advantages and unique methods of application. This blog will compare these three channels and provide examples of how each can be used, helping you decide which one is right for you.
I. Bollinger Bands
Understanding Bollinger Bands
Bollinger Bands, developed by John Bollinger in the 1980s, is a volatility-based indicator that measures the standard deviation of price movements. It consists of three lines: a simple moving average (SMA) and two bands that are typically set at two standard deviations above and below the SMA. The distance between the bands adjusts as volatility increases or decreases.
Using Bollinger Bands
Bollinger Bands are useful for identifying price movements and potential reversals. When the bands contract, it indicates low volatility, and when they expand, it signals high volatility. A common strategy is to look for a breakout or breakdown when the bands contract.
Example: If a stock's price has been trading within a narrow range, and the Bollinger Bands contract, a trader might anticipate a breakout or breakdown. If the price breaks above the upper band, it could signal a bullish trend, while a break below the lower band suggests a bearish trend. This breakout should be confirmed with other indicators such as the MACD or RSI.
II. Donchian Channels
Understanding Donchian Channels
Donchian Channels, developed by Richard Donchian in the 1960s, is a trend-following indicator that measures the highest high and lowest low over a set number of periods, typically 20 periods. It consists of three lines: the upper channel line, the lower channel line, and the middle line, which is the average of the upper and lower lines.
Using Donchian Channels
Donchian Channels are primarily used to identify potential breakouts and breakdowns. Traders often use the channels to assess the strength of a trend and determine entry and exit points. The Donchian cloud can be a great tool for establishing lines of support and resistance as the price makes higher highs and lower lows and conversely lower highs or lower lows.
Example: If a stock's price is consistently hitting highs, a trader might use the Donchian Channels to identify a possible breakout. If the price breaks above the upper channel line, it could signal a continuation of the bullish trend. Conversely, if the price breaks below the lower channel line, it may indicate a potential trend reversal. I typically look for a secondary lower high or higher lower to confirm a reversal and then confirm the breakout with an oscillator as seen in the example below.
III. Keltner Channels
Understanding Keltner Channels
Keltner Channels, developed by Chester Keltner in the 1960s and later modified by Linda Raschke, is a volatility-based indicator that uses the average true range (ATR) to measure price movements. It consists of three lines: an exponential moving average (EMA) and two bands set at a multiple of the ATR above and below the EMA.
Using Keltner Channels
Keltner Channels are effective for identifying potential trading opportunities during trending markets and can be used in conjunction with other indicators to confirm price movements. The Keltner Channel is a great tool for identifying overbought/ oversold conditions in a trend. This can help traders find better points of entry for a trade.
Example: A trader might use Keltner Channels to identify potential pullbacks in a trending market. If the price moves above the upper channel line during an uptrend, it could signal an overbought condition, and the trader might wait for the price to pull back toward the EMA before entering a long position. Similarly, if the price falls below the lower channel line during a downtrend, it might indicate an oversold condition, and the trader could wait for a bounce back toward the EMA before entering a short position. The trader should also verify the bounce with other indicators as shown below.
IV. BONUS: Keltner/Bollinger Bands Squeeze Strategy
Channels do not have to be exclusively used on their own. The Keltner/Bollinger Bands Squeeze Strategy is a powerful technique that combines the strengths of both Keltner Channels and Bollinger Bands to identify potential trading opportunities. By understanding the nuances of this strategy, traders can significantly enhance their trading arsenal and make more informed decisions in the market.
The Squeeze: A Sign of Consolidation and Potential Breakout s
The Keltner/Bollinger Bands Squeeze occurs when the Bollinger Bands contract within the Keltner Channels, indicating a period of low volatility or consolidation in the market. This "squeeze" can serve as a precursor to significant price breakouts, either on the upside or downside. By closely monitoring this pattern, traders can identify periods of market consolidation and prepare to capitalize on potential breakouts.
How to Implement the Keltner/Bollinger Bands Squeeze Strategy
To implement this strategy, traders should follow these steps:
Overlay the Keltner Channels and Bollinger Bands on your chart: Start by adding both Keltner Channels and Bollinger Bands to your preferred trading platform's chart. Ensure that the settings of both indicators are adjusted to your desired values.
Identify the Squeeze: Look for periods when the Bollinger Bands contract within the Keltner Channels. This signifies a "squeeze" and acts as a sign that the market is experiencing low volatility or consolidation.
Monitor for Breakouts: Keep a close eye on the price action during the squeeze. When the Bollinger Bands expand outside of the Keltner Channels, this indicates a potential breakout from the consolidation period. The direction of the breakout (upwards or downwards) will depend on the overall market trend and price action.
Enter the Trade: The Keltner/Bollinger Bands Squeeze Strategy can be further enhanced by combining it with other technical indicators, such as the Relative Strength Index, or Moving Average Convergence Divergence. These complementary indicators can provide additional confirmation of potential breakouts and help traders better gauge market conditions. Once a breakout is confirmed, traders can enter a trade in the direction of the breakout. It's essential to use stop-loss orders and manage risk appropriately since false breakouts can also occur.
Exit the Trade: Traders should establish a price target and exit strategy based on their analysis and risk tolerance. This can include setting a specific profit target, using trailing stops, or leveraging other technical indicators to determine when to exit the trade.
Conclusion
Bollinger Bands, Donchian Channels, and Keltner Channels are all valuable technical indicators for analyzing price movements and identifying potential trading opportunities. When deciding which one is right for you, consider your trading style, preferred timeframes, and the specific characteristics of the markets you trade. It's essential to familiarize yourself with each indicator and practice using them in combination with other tools to enhance your trading strategy. We have even shown that these channels can complement each other to form a more comprehensive strategy. Remember, no single indicator is perfect, and incorporating multiple tools can help you gain a more comprehensive understanding of market dynamics. Good luck and happy trading!
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BTC Trend analysis with Donchian and Macaron Tools / SHORT setupInitial idea: Price seems like it tried to break above 30k twice, and failed, this makes me feel that it needs to grab more buyers from lower prices and come up stronger.
1st chart:
Donchian channel is already broken since 21 Apr at a price of 27983, this sets up the price action wise break needed to go down. Macaron tools are indicators I made to better visualize the trend (Thanks to @Madrid for the heatmap idea.). They are very similar to moving average crosses, but they are not. For the last 4 days it was trying to get full red, and for the last 2, it is. This means both the trend and the price action is already bearish. If you don't want to wait for the 2nd charts setup (basically confirmation), the way to go now is shorting my dear bitcoin.
Entry: Current Price (27700)
Take Profit: 24640 / because that's the latest resistance area
Stop Loss: 30130 / because it's just a bit above the donchian trend
Trailing Stop Loss: Donchian(11, 10) this simply means the highest high of the last 10 bars
2nd chart:
Donchian channel here has a much longer length and thus breaking it is harder, also it has never been broken since the up movement from 19k, highlights the heaviness of it. When it breaks it'll probably be caused by a dump that started before (probably in the 1st setup), thus if it continues to go down we should just ride the wave.
Entry: 26840 / because donchian is at 26919 so if the price continues to go down after hitting that and also breaks 26850, it'll continue (probably, hopefully)
Take Profit: 24640 and (23400/23250) / if you want to be fully safe just close your position at the first tp. If you want to take multiple ones go with the 1st and the 3rd but use trailing stop. You can customize your position however you like.
Stop Loss: 30130 / if it breaks above here the trend will be questionable (it may just hit and come down too, but less probable) so we'll just close the trade
Trailing Stop Loss: Same with the 1st setup, the highest high of the last 10 bars
Thanks to @KivancOzbilgic for the donchian channel indicator.
Since this is my first post here, please give me any feedback you may have. Thanks for reading, happy trading!
PS: I will not be taking the trade because of the CPI announcement tomorrow.
Daily Chart Indicators Using Donchian Channels (length 20) - EMA 200 & MACD Crosses (40,50,9)
Let me know what yall think of this setup!
Donchian Channel Indicator: The Complete A Trader's GuideChannel forex trading strategies are very popular among traders. This fact is because the channel within which the quotes move is regularly formed on any instrument, any time frame, and can be used in a variety of ways (breakout strategy, rebound strategy, etc.) as a ready-made trading tactic.
There are Linear Progression Channels, Bollinger Bands, Fibonacci Channels, Envelopes, Ichimoku Channels, and Donchian Channel, which is created based on the Donchian Channel Indicator. It will become the main character of our today`s article. Let us consider in more detail the principle of its use and the rules for placing orders.
The Donchian Channel Indicator: Description And Main Signals
Richard Donchian is one of the legendary traders of the last century. He was the originator of the Turtles trading system. As it often happens, the peak of his popularity and success came to him late, at a respectable age. Donchian was a true workaholic, giving much energy to trading and creating effective trading theories. His works were used by a lot of traders, some of which were included in the top ten of the best market professionals, for example, Linda Raschke.
Initially, the Donchian Channel was developed for trading by breakout strategies when the price goes out of the channel and crosses one of its borders. As a rule, a new powerful trend starts at such moments.
What Does The Donchian Price Channel Look Like?
The algorithm looks like two curves, one of which corresponds to the upper limit of the corridor and the other - to the lower one. The upper curve shows the price maximums for the selected time period. The lower boundary shows the levels of price lows, also for a certain period of time. When price minimums/maximums are updated, the lines are rearranged and the channel width decreases or increases depending on the market situation. Another broken dotted line runs in the center of the channel.
The price position relative to this line shows the market trend:
When the price breaks out of the middle line of the channel from the bottom up and rises higher, it indicates the bulls' advantage in the market. Price is trending upwards.
When the price crosses the middle line of the channel from top to bottom and goes lower, it indicates a bearish advantage in the market. The price goes downward.
The Donchian Channel is also called a volatility indicator because it uses chart extrema in its calculations. The tool looks a bit like Bollinger Waves, but its lines are smoother and do not react as strongly to price changes as Bollinger Bands lines.
Channel Boundaries Signals
According to the indicator, trades can be opened at the moments of a breakout as well as a rebound from the channel borders.
Signals arising when price breaks out a channel edge are called trend signals:
If the price breaks out the upper level of the Donchian Channel from the bottom up and the breakout candle closes above it, this is a buy signal. An uptrend begins;
If the price crosses the lower level of the Donchian Channel from above downwards and the breakout candlestick is closed under it, this is a sell signal. The downtrend begins.
The breakout can be not only a true breakout when the boundary is crossed by the candle's body and the candle closes outside the range but also a shadow one.
It can be called a shadow breakout, which was made by the candlestick's shadow, but the candlestick itself closed inside the Donchian Channel.
The shadow breakout occurs before the price reverses after the rebound from the channel's boundary:
If the shadow of the candlestick breaks out the lower boundary, and then the price returns to the channel and closes inside it, this is a signal of an upward reversal. You can place a buy order;
If the shadow of the candlestick crosses the upper boundary, and then the price goes back inside the channel and closes there, this is a signal of a downward reversal. You may enter into a sell trade.
A shadow breakout usually indicates a price reversal from the broken-out boundary.
Price may not only break out the channel boundary but also rebound from it. In this case, the price moves inside the channel, and then, having touched one of its boundaries reverses in the other direction.
Signals when the price rebounds from the Donchian Channel boundaries:
If the price rebounds from the upper boundary of the channel, this is a sell signal;
If the price rebounds from the lower boundary of the channel, this is a signal to buy.
Changing the channel width also indicates a change in the market situation. For example, if the Donchian Channel becomes narrow, it indicates a flat. The market is calm at the moment, the volatility is low. When the price extremums are updated, the channel starts expanding, indicating the increase in market volatility:
If the channel expands as a result of updating price lows, you can open a sell trade;
If the channel expands as a result of updating price highs, you can open a buy trade.
Even though the Donchian Channel is quite an effective tool, it is not recommended to open positions only by its signals. It is necessary to use additional tools for signal confirmation.
Calculation Of The Donchian Channel Indicator
To plot the Donchian Channel, we should use the absolute minimum and maximum of the quote for the definite period. The upper boundary of the channel is drawn through the specified maximum, and the lower – through the minimum for the same period.
In the time period, only the number of candlesticks is always considered. For example, period 10 for the D1 chart is equal to 10 days, for the H1 chart – to 10 hours, and for the M5 – to 50 minutes.
In other words, a breakout of a 10-day channel on the D1 chart means that the 10-day maximum is broken out when the upper boundary of the channel is broken out, or the 10-day minimum when the lower boundary of the channel is broken out. In other words, the upper boundary is equal to the maximum value of the quote for the selected period, the lower boundary – to the minimum value, and the average boundary is equal to the sum of the upper and lower bounds divided by 2.
Donchian himself used the value of the channel period 20 for daily charts because it equals the average number of working days in a month. But we can experiment with the period value, considering that we can trade in any time frame. The most popular and well-proven variants are 18, 24, and 55.
Donchian Channel + RSI Trading Strategy
Let's consider an example of a simple trading strategy based on the Donchian Channel and RSI oscillator signals.
Chart time frame – H1. Currency pair – any currency pair with average or high volatility.
Positions may be opened on the rebound of the price from the boundaries of the Donchian Channel. The RSI indicator will confirm the rebound signal, coming out of the oversold or overbought area.
A long position may be entered under the following conditions:
The price reaches the lower boundary of the Donchian Channel, fails to break it out, and turns in the opposite direction. Either there was a shadow breakout and the price returned to the channel limits.
RSI exits the oversold area, breaking out the 30 level from the bottom to the top.
Take Profit should be set on the upper curve of the Donchian range. Stop Loss can be placed outside the lower boundary of the Donchian Channel.
A sell order may be made under opposite conditions:
The price reached the upper boundary of the Donchian Channel. It fails to cross the upper boundary of the Donchian Channel, it rebounds and turns in the opposite direction. The second option - a shadow breakout occurs and the chart returns to the channel.
The oscillator has left the overbought area, breaking out the line of 70 downwards.
Fixing Take Profit should be set at the lower border of the Donchian Channel. A protective Stop-Loss can be placed outside the upper boundary of the Donchian Channel.
Donchian Channel + MACD Trading Strategy
This strategy involves opening a trade at the Donchian Channel boundaries breakout moments. Trading will be done based on the trend. To confirm the signals of border breakout a trend oscillator MACD is used.
The time frame of the chart is M15. The asset to be traded should have medium or high volatility.
It is possible to open a long position, provided that:
The Donchian Channel begins to widen in the direction of the uptrend. The maximums of the chart begin to increase sequentially;
The candlestick breaks out the upper boundary of the Donchian Channel and closed above it;
The MACD indicator is above zero, and the histogram is increasing.
If all three conditions coincide, it is possible to open a buy order. Stop Loss is placed behind the local minimum. Profit can be fixed by Take Profit, calculated using the formula SL*2, or manually when the opposite signal is received.
You may enter a short position when receiving the following signals:
Donchian Channel corridor begins to expand in the direction of the downtrend; The price minimums start to decrease consistently;
The candlestick crosses the lower level of the channel and closes under it.
The MACD indicator is below zero, the histogram is decreasing.
If all three signals coincide, one can open a short position right away. Stop Loss is placed behind the local maximum. The profit can be fixed by Take-Profit, equal to at least two Stop Losses. You can also fix the profit manually by closing the order when the signal to the contrary appears.
Advantages And Disadvantages Of The Donchian Channel Indicator
The Donchian Channel has its own characteristics. Among the advantages, we can note its simplicity and efficiency. The indicator consists of only three lines, which are superimposed over the chart of price movements.
The Donchian Channel gives sufficiently high-quality signals. However, it may sometimes be wrong in low time frames, as there is market noise on such charts. Therefore, it is recommended to combine it with other indicators.
Donchian Channel perfectly combines with oscillators, such as RSI, Stochastic Oscillator, MACD, etc. While trading price breakouts, the Donchian Channel is combined with trend indicators - Parabolic SAR, Power Fuse, MACD, Moving Average, etc.
Conclusion
Although the Donchian Channel signals look simple, they have already proven to be effective. Understanding the basis of channel formation, you can make your own "add-ons" to the strategy, such as using the MA as an additional indicator, etc. To better filter, the signals, try combining them on the chart with other indicators and oscillators.
Dual Donchain Channel set-up for better viewHi TV community.
You may have used Donchain Channel (DC) in your trading setups. But have you used two in conjunction?
Add two DC, one set to 144 period and the other to 21 period. Now, you will be able to see the levels where the shorter DC is providing support or resistance to price. So, when you wish to take a long entry; if price is hitting the low of shorter DC and it is above the longer period DC, then you may consider the trade by keeping SL at longer period DC and vice-versa for short trades.
Along with the indicators that you already use, these two together give you additional clarity on PA and help you to take informed trades.
Another advantage is that you can avoid trades where price is hovering in between the upper and lower levels as those areas can be risky. Consider long trades when price has hit the lower level and a short trade when price has hit upper level and of course, by studying rest of PA in totality.
Hope this information is of help to you.
