ФОРЕКС DONCHIAN CHANNELS

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Donchian Channels Definition

Donchian Channels are three lines generated by moving average calculations that comprise an indicator formed by upper and lower bands around a midrange or median band. The upper band marks the highest price of a security over N periods while the lower band marks the lowest price of a security over N periods. The area between the upper and lower bands represents the Donchian Channel. Career futures trader Richard Donchian developed the indicator in the mid-20th century to help him identify trends. He would later be nicknamed «The Father of Trend Following.»

Key Takeaways

  • The indicator seeks to identify bullish and bearish extremes that favor reversals as well as higher and lower breakouts, breakdowns, and emerging trends.
  • The middle band simply computes the average between the highest high over N periods and the lowest low over N periods, identifying a median or mean reversion price.

The Formula for Donchian Channels Is:

How To Calculate Donchian Channels

Channel High:

  1. Choose the time period (N minutes/hours/days/weeks/months).
  2. Compare the high print for each minute, hour, day, week, or month over that period.
  3. Choose the highest print.
  4. Plot the result.

Channel Low:

  1. Choose the time period (N minutes/hours/days/weeks/months).
  2. Compare the low print for each minute, hour, day, week, or month over that period.
  3. Choose the lowest print.
  4. Plot the result.

Center Channel:

  1. Choose the time period (N minutes/hours/days/weeks/months).
  2. Compare high and low prints for each minute, hour, day, week, or month over that period.
  3. Subtract the highest high print from the lowest low print and divide by 2.
  4. Plot the result.

What Do Donchian Channels Tell You?

Donchian Channels identify comparative relationships between current price and trading ranges over predetermined periods. Three values build a visual map of price over time, similarly to Bollinger Bands, indicating the extent of bullishness and bearishness for the chosen period. The top line identifies the extent of bullish energy, highlighting the highest price achieved for the period through the bull-bear conflict. The center line identifies the median or mean reversion price for the period, highlighting the middle ground achieved for the period through the bull-bear conflict. The bottom line identifies the extent of bearish energy, highlighting the lowest price achieved for the period through the bull-bear conflict.

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Example of How To Use Donchian Channels

Image by Sabrina Jiang © Investopedia 2022

What are Donchian Channels?

In this example, the Donchian Channel is the shaded area bounded by the upper green line and the lower red line, both of which use 20 days as the band construction (N) periods. As price moves up to its highest point in the last 20 days or more, the price bars “push” the green line higher, and as price goes down to its lowest point in 20 days or more, the price bars “push” the red line lower. When price decreases for 20 days from a high, the green line will be horizontal and then start dropping. Conversely, when price rises from a low for 20 days, the red line will be horizontal for 20 days and then start rising.

The Difference Between Donchian Channels and Bollinger Bands

Donchian Channels plot the highest high and lowest low over N periods while Bollinger Bands plot a simple moving average (SMA) for N periods plus/minus the standard deviation of price for N periods X 2. This results in a more balanced calculation that reduces the impact of big high or low prints.

Limitations of Using Donchian Channels

Markets move according to many cycles of activity. An arbitrary or commonly used N period value for Donchian Channels may not reflect current market conditions, generating false signals that can undermine trading and investment performance.

What Everyone Should Know About the Donchian Channel Indicator

The basics of stock trading, Forex trading, and trading in general are simple. You always aim to sell at a higher price than you buy. In that case, the Donchian channel indicator can help us a lot in trading. Additionally, it may be interesting for you to learn about a trading indicator that is simple to understand and use, being part of a successful trading strategy. We’re talking about the Turtle trading system, of course. Before we delve any deeper, let’s perform a quick breakdown of the Donchian channel indicator:

The Donchian Channel Formula

The indicator simply takes a user-defined number of periods, and calculates the upper and lower bands. It plots two lines on the chart, according to the Donchian channel formula. This straightforward formula states that:

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  • The upper line is the highest price for the last n period
  • The lower line is the lowest price for the last n period

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The default value for n is set as 20 in MetaTrader 4 (MT4), but you can set it at whatever value you prefer. However, some versions of the Donchian channel indicator also plot a third line. This centreline is simply the ‘mean’ of the upper and lower values – namely, the centreline = ( n-period high + n-period low) /2

How the Donchian Indicator Works

Donchian Channels were invented by the professional trader Richard Donchian, one of the pioneers of technical analysis. The Donchian channel plots two lines on a chart:

  • One line is the highest high over a set period
  • The other line is the lowest low over a set period

You as a trader should decide the time frame in question, though the default period number used in the classic Donchian system is 20 days.

Installing the Donchian Channel Indicator on MT4

Although the Donchian Channel is a well-known indicator, it’s not one of the standard indicators that comes with MetaTrader 4. If you want to use the Donchian Channel on MT4, you will need to download it as a custom indicator. The reason for this is that many of the Donchian channels indicators on the MT4 market might not be that accurate, and some of them might slow the platform down. One of the key advantages of MetaTrader 4 is the accessibility of its programming language.

The MT4 user base is large, active, and includes a huge variety of custom indicators. But that can also be a disadvantage, as this means that there is more than one Donchian channel indicator download available, and they might be coded incorrectly. If you want to enhance your trading experience even further for free, why not download the custom MetaTrader Supreme Edition plugin? It includes a fully and professionally coded Donchian Channel indicator.

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Downloading and Installing the Donchian Indicator on MT4

Downloading the Donchian channel indicator is easy. First find the Donchian channel file you want in the MetaTrader community, by clicking on the ‘Help’ tab in MT4, then click ‘MQL4.community’. Once you’ve downloaded it, find the file’s location on your computer and copy it to your clipboard.

Now go into MT4 and follow these steps chronologically:

  1. Select ‘File’
  2. Click ‘Open Data Folder’
  3. Open the ‘MQL4’ folder
  4. Open the ‘Indicators’ folder
  5. Paste the downloaded indicator file from your clipboard

When you restart MT4 you should see the Donchian channel indicator listed in the ‘navigator’. So let’s take a closer look at the indicator now:

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Source: Admiral Markets MT4 Platform — Navigator Window

Using the Donchian Channel Indicator in MT4

Turtle Trading Strategy

Who were the Turtles and what was the strategy that earned them millions of dollars?

Two Wall Street gurus once turned a group of novices into million-dollar traders. As if that’s not enough, they achieved this in a matter of weeks. This group of traders were known as the ‘Turtles’ . In the mid-eighties, a well-known commodity speculator, Richard Dennis, made a bet with his friend Bill Eckhardt. The heart of the matter was a question of nature versus nurture – whether great traders are born that way or whether they can be trained.

The bet then got serious.

Serious enough that Dennis took out ads in the Wall Street Journal and the New York Times , for applicants to be a part of this grand experiment. After an initial training period of just two weeks using Dennis’ methods, applicants were let loose with real money. After a month’s trial period, the best Turtles were given upwards of $1 million USD to trade with.

The most successful ‘Turtle’ was just 19 years old, and was given $2 million USD, which he turned into more than $30 million in profit. As it turns out, the trading rules they used were actually fairly simple. In essence, they used what is called a Donchian Trend system. And yes, you guessed it – at the heart of that system is the Donchian channel indicator.

The Turtles used two breakout variants, or «systems». The first system (System One) used a 20-day price breakout for entry. However, the entry was filtered by a rule that was designed to increase the odds of catching a big trend, which states that a trading signal should be ignored if the last signal was profitable. But this filter rule had a built-in problem. What if the Turtles skipped the entry breakout? and that skipped breakout was actually the best possible early entry? What if that was a beginning of a big and profitable trend that spanned up or down by a huge extent?

If the Turtles skipped a System One 20-day breakout and the market kept trending, they needed to use something to get back into the market. That’s where ‘System Two 55-day’ kicks in. The System Two breakout acted as a fail-safe. That is how the Turtles stopped themselves from missing big trends that were filtered out. The strategy using their System Two is pretty simple:

  • Buy a 55-day breakout, if you are not already in the market, and short a 55-day breakout if you are not in the market
  • The strategy using System One is slightly different. Buy a 20-day breakout if the last S1 signal was a loss, and go short on a 20-day breakout if the last S1 signal was a loss

The Turtles calculated the stop loss for all trades using the Average True Range (ATR) of the last 30 days, a value which they called ‘N’. The initial stop-loss was always ATR (30) * 2, or, in their words, two volatility units. Additionally, the Turtles managed to compound their profits back into winning trades to maximise their winnings, commonly known as pyramiding. They could pyramid a maximum of four trades, separated from each other by a 1/2 volatility unit.

The Exit Strategy

The Turtles usually exited their trades using breakouts in the opposite direction, which allowed them to ride very long trends. The exit strategy used in their System Two is as follows:

  • Exit long positions if/when the price touches a 20-day low
  • Close shorts positions if/when the price touches a 20-day high

Donchian Channel Indicator

The exit strategy using System One used a slightly different methodology

  • Close long positions if/when the price touches a 10-day low
  • Close short positions if/when the price touches a 10-day high

The Turtle Strategy Money Management System

Turtles used the 2% initial risk for all trades. However, slightly aggressive pyramiding of more and more units had its downside. If no big trend materialised, the little losses from false breakouts would eat away even faster at the Turtles’ limited capital. How did Eckhardt teach the Turtles to handle losing streaks and protect their capital? They cut back their unit sizes dramatically.

When markets turned around, this preventive behaviour of reducing units increased the likelihood of a quick recovery, getting back to making big money again. The rules were simple back then. For every 10 per cent in account drawdown, the Turtles cut their trading unit risk by 20 per cent. This of course applies to bigger numbers. The unit risk would be decreased by 80%, with a 40% drawdown.

An Example of the Turtle Trading Strategy

Depicted: GBP/USD Daily Chart — Admiral Markets MT4-SE Platform — Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

In the chart above you can see the daily GBP/USD currency pair chart in MT4, with the Donchian channel custom indicator applied several times. To set up the Turtle system chart, apply the Admiral Markets Donchian channel indicator three times. We used the Turtle trading rules with these settings for this particular example. You can change the colours and the line width to your preference.

Source: Admiral Donchian Indicator — Admiral Markets MT4SE Platform

Source: Admiral Donchian Indicator — Admiral Markets MT4SE Platform

Source: Admiral Donchian Indicator, Admiral Markets MT4SE Platform

Notice how the price breaks out above and below the Donchian channels in various places? As noted earlier, the Donchian channels show the highest high with the lowest low for your specified time. When the price breaks through the channels, we are able to see new highs or new lows being set. This is an indication of a possible start of a new trend.

For Turtle Trading on MT4 we use following rules: Set up a daily chart. Wait for the price to exceed the high or the low price of the past 20 periods (Donchian Channel 20). Open a long or short based on the breakout. The arrows show possible entries.

Depicted: GBP/USD Daily Chart — Admiral Markets MT4-SE Platform — Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

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If the previous 20-bar breakout resulted in a profitable trade, the new breakout would be ignored. If you ignore a 20-bar breakout, you might be at risk of missing a big trend, should the price continue to move in the direction of the breakout. That is when the aforementioned ‘System Two’ might become useful. If the price exceeds the 55-bar high/low, you open a long/short position depending on the breakout direction respectively. In the case that you didn’t open a trade at the 20-bar breakout, every 55-bar breakout is taken, whether or not the previous one was a winner.

Depicted: GBP/JPY Daily Chart — Admiral Markets MT4-SE Platform — Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Using MT4SE to Improve the Turtle Channel Indicator

In order to use proper money management (described at the beginning of the article) traders might need to add a few additional indicators:

  1. The ATR (Average True Range) set on a 20 period

The ATR (20) is used for the exit strategy. Bear in mind that exits can be far from the entry price, so the initial stop-loss is placed at ‘2 x ATR 20’ for both systems. For example, if the ATR is 101 pips, the initial stop-loss would be placed at 202 pips from the entry price, and then manually updated once the 10 or 20-bar low/high is lower/higher than the initial stop.

The Admiral Pivot indicator could be set on monthly if you are trading the Daily time-frame, and it can help with exits as well. Admiral Pivot uses standard price information, such as high, low, and close, and uses this information to project possible support and resistance levels, but also much more, allowing traders to customise different the different types of time-frames used for calculation.

Depicted: GBP/JPY Daily Chart — Admiral Markets MT4-SE Platform — Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

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Bear in mind that the Admiral Donchian is also available on the MetaTrader 5 trading platform as well.

Depicted: USD/JPY Daily Chart — Admiral Markets MT5-SE Platform — Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

A Summary of Donchian Channels

We now know that the Donchian channel indicator is a simple but effective indicator that plots the highest high and the lowest low over a set period of time. It is also useful for identifying price breakouts and is used in some trend-following systems too. The Donchian channel indicator is available in numerous versions for MT4, and produces false signals that can be minimised with filters.

Markets have changed a lot over the years, so even the Turtle strategy needs some serious modifications. Additionally, the Donchian channels can be used in many different ways, so feel free to experiment on a risk free Demo trading account before opening a high-risk, high-reward live account.

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Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world’s most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

How To Use Donchian Channels (Donchian Channel Scalping Strategy — High Success Rate Strategy)

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3 Simple Donchian Channel Trading Strategies

Before we dive deeply into the indicator, we first have to understand its creator – Richard Donchian.

Richard’s parents migrated to the states from Armenia just 20 years before his birth in 1905. Richard was educated in the best schools, and it was presumed he would help run the family’s business. Well, in comes the market to disrupt this very linear path to work life. Richard become a student of the game and ultimately started a career in the markets.

After serving honorably during World War II, Richard created the very first futures trading group. Ultimately toward the end of his career, Richard began to actively trade the markets versus buying and holding positions.

Remember, active trading in the 50s and 60s is nothing like today.

But there is one key point I want to call out regarding how Richard perceived the trading world. Richard by definition was a conservative trader. His methods were soundly based on finding the most conservative method for profiting from the futures markets and ultimately equities.

I make this point to establish upfront before we go deeper, that Richard thought it was best to trade low volatility stocks.

Another critical point for all you would be investors is that Richard did not start to make money until his later years. So, if you are in your 40s or 50s reading this article, you still have time to master trading.

This is completely contrary to what you see all over the web with 20 somethings driving fast cars making fast money. Trading can be a supplemental income stream for those of us who were born before the Facebook era.

How to Calculate Donchian Channels

Richard Donchian created Donchian Channels, which is a type of moving average indicator and a look-alike of other support and resistance trading indicators like Bollinger Bands.

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Donchian Channels has a simple plotting of highest high and lowest low of the last “n” periods. The “n” periods is based on the trader’s choice, who can select the period according to their requirements ranging from a day, hour and minutes etc. Traders use Donchian Channels to understand the support and resistance levels.

Donchian Channels Scalping Forex Strategy. How To Trade Live Examples.

Isn’t it a very simple calculation as compared to Fibonacci?

Let’s dig further into how Donchian Channels are used…..

Donchian Channels usage in Trading

Donchian Channels is a popular indicator for determining volatility in market prices.

The channels are wider when there are heavy price fluctuations and narrow when prices are relatively flat. Generally, investors use 20-periods with the Donchian Channels as the default trading setting, but this value can be tweaked based on your trading style.

Now, let’s take a look at the below image to illustrate Donchian Channels. Since Donchian Channels are primarily used to determine volatility, we have accordingly selected the velocity Shares 3X Inverse Crude ETN linked to the S&P GSCI Crude Oil Index Excess Return(NYSEARCA:DWTI). We have selected these securities due to the recent oil price fluctuations in the market. We have taken the default DC (20) setting in the chart and selected “day” for the time period.

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In the below image, you can see that the wider price range is highlighted in blue while the narrow price range is in yellow.

Donchian channels are mainly used to identify the breakout of a stock or any traded entity enabling traders to take either long or short positions. Traders can take a long position, if the stock is trading higher than the Donchian channels “n” period and book their profits/short the stock if it is trading below the DC channels “n” period.

Let’s identify buy/short positions by taking an example of Apple stock and applying the Donchian channels strategy. We have taken a 1-hour chart covering Apple stock’s movement from April 20 th , 2022 to June 23 rd , 2022. As you see, we placed our Donchian channels indicator on the existing trend which is visible on the left side of the image.

Now, in the below image you can see that we have highlighted major breakouts. At the extreme left of the chart, on the lower side, we have identified a price breakout of a downward trend, signaling traders to open a short position or liquidate long positions. Hence, we open a short position at $106.67 on April 20 th . Accordingly, the stock had a sharp correction after a few days.

Donchian channels again indicated a buyback position during the mid-week of May 2022. We cover our short position at $94 on May 16 th , which resulted in over $12.67 profit per share.

Meanwhile, we have also identified the price breakout on the lower side of the channel, indicating the start of the new downtrend in the stock. We have highlighted this in blue in the below image.

Donchian Channels – Breakout Trades

Also, note that you need to confirm the uptrend or downtrend, with two consecutive touchpoints of the Donchian channel before pulling the trigger on a trade.

For instance, if we look at the same Apple chart below, we have highlighted where there are two consecutive price increases/decreases confirming our buy/sell trends with Donchian channels.

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Donchian Channels – Multiple Touches

Trading with the Middle Band

The middle band is the average of the upper and lower bands. The middle band in Donchian channels could also be used as a breakout indicator. If the stock rises above the middle band of the Donchian channels, then you can open a long position. On the contrary, if the stock is trading below the middle band of the Donchian channel, then a trader can open a short position.

For the below chart, we have identified buy and sell positions for Apple, based on the Donchian channels middle band. We have highlighted in orange short/sell positions and buy/long positions in blue.

Donchian Channels – Middle Bands

Three Simple Donchian Channel Trading Strategies

Now, let’s have a look at a few Donchian Channel trading strategies, which can be incorporated into your current trading methodologies.

Combining Donchian Channel trading strategies with other trading strategies might decrease the false entry/exit signals and give a clearer picture of trading opportunities.

Donchian Channel + MACD

Let’s combine the Donchian Channel trading strategies with the commonly used MACD. Here let’s try to match the moments when the price interacts with important Donchian Channel entry points in conjunction with MACD crosses.

When we discover this correlation between Donchian Channel and MACD, we would be able to filter the false entry signals and attain a better success rate for our trade opportunities.

Let’s have a look at the below 30-minute chart for Microsoft from May 13 th to June 23 rd , 2022.

Here we have identified a buy signal for Microsoft at $51 from the Donchian Channel as well as MACD on May 24 th .

We received a sell signal from MACD on the following day, and at this point, the stock had already risen to $52.40, giving traders a profit of over $1.4 per share. This is definitely a lucrative return in the span of two days.

Donchian Channel and MACD

Donchian Channel + Volume Oscillator

Let’s have a look at Randgold Resources Ltd. (ADR) (NASDAQ:GOLD) chart from May 9 th , 2022 to June 23 rd , 2022. The stock had a wide trading range in the two months given fluctuating gold prices. We have selected the default Donchian Channel (20) and Volume Oscillator for this period.

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We have identified a buying opportunity at the upper band as per the Donchian Channel on May 31 st at $85.07. At the same time, the Volume Oscillator started rising and crossed above zero indicating strong volumes at these levels. We have highlighted the buying opportunity in violet for both indicators.

After initially trading flat, the stock delivered outstanding returns for a number of days before indicating a sell signal on June 10 th , and this trend was supported by the volume oscillator, which was heading below zero while prices were falling. We have identified the sell position in red for both the trading strategies in the below image.

By the time we receive the sell signal, the stock had already generated strong returns topping out over $94.28 on June 10 th . This would have resulted in over $9.21 per share returns in a span of one week.

Wow! Isn’t it attractive?

Donchian Channel and Volume Oscillator

Donchian Channel + Stochastic Oscillator+ Moving Average

Lastly, we are going to cover a trading strategy with the stochastic oscillator and moving average.

We have taken an Amazon chart from May 22 nd , 2022 to June 24 th , 2022. Let’s take a look at how we have applied these three indicators to establish a trading position.

Donchian Channel Strategy

First, we have a buy signal from the Donchian Channel on May 2 nd , 2022.

Next, we have a buy from the Stochastic Oscillator within three days on May 5 th .

With the stock price breaking out above the moving average on May 6 th , the bullish trend is confirmed. Accordingly, we open a long position slightly above $669.

Consequently, the stock rallied for over a week post-May 9 th touching more than $720.

Donchian Channel and Stochastic and Moving Average

The stock prices started consolidating and we received our sell signal from the Donchian Channel on May 17 th . In addition, the stock was trading below the moving average indicator as well and the stochastic oscillator gave an overbought signal.

This trade generated us a profit of $31 per share in a span of just two weeks.

Donchian Channel with Futures

Now that we have covered three simple strategies you can use with the channels when trading stocks, let’s take a look at how to use Donchian channels when trading futures. Remember, Donchian originally created the indicator to trade commodities.

So, let’s take a look at the gold market to see if the indicator is able to provide us with some sort of edge.

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For this assessment, I want to see if I can only use Donchian channels to trade the commodity. Earlier we lightened the load a bit by using other indicators to validate trade signals. I’m afraid this will be a little tougher.

First I started looking at intraday charts for the gold contract. Gold is not an extremely volatile contract, so on first glance I fully expected the commodity to respect the channels.

Well, guess what, my assessment was not accurate. The charts looked like this on an intraday basis.

Now every intraday chart of the gold contract does not look like this. So, this may feel a little dramatic.

However, I do want to make the point that Richard’s original intent for the channels is as a trend following system. Therefore if you start to trade a choppy market on an intraday basis, you will be overloaded with false signals. Again, we are attempting to trade the contract without any additional help from other signals.

So, what I noticed is that in order for things to become clearer, we just need to increase the time frame.

Daily Price Charts

Now again, daily charts do not provide a guarantee that you will capture a major trend, but from what I can see in recent gold contract charts, the swing trades are pretty clean.

So, how do we navigate between major trends and sideways action just using the channels?

The answer, horizontal trend lines.

Notice how the gold contract began to base and trade sideways. The contract also had multiple touches of the lower band.

After this consolidation period, the contract then broke out higher which was the start of a strong run-up. At this point, you hold the contract until the lower band is breached.

Testing A 60% Win Rate Donchian Channel Strategy (Best Trading Strategy?)

If you want to use a more aggressive stop, you can place an order right at the middle line. The thing about low volatility securities is once the tide shifts, it’s like steering the Titanic.

Donchian Channels and Low Volatility Stocks

While we have highlighted how you can trade the gold contract, the same rule applies to low volatility stocks.

Donchian Channel With Ema Forex Trading Strategy

Donchian Channel with Low Volatility Stocks

The above chart is of IBM. Notice how the stock just continues to grind higher over a two-month period. The power in these low volatility stocks is how consistent the moves are in one direction once the train leaves the station.

Where Donchian Channels Can Fail You

That title is a bit telling. It’s likely not the indicator but more likely our misinterpretation of the signals. Below are a few areas where the Donchian channel may be tough to read.

Low Float Stocks

Low float stocks are not bound by any indicator, especially Donchian channels. The challenge with the Donciahn channels is that it does not factor in the most recent market volatility. The indicators provide an equal weighting to all data points.

Therefore when a low float stock picks up and goes on a run, the lower bounds not capture the price movements quickly enough, thus risking giving back more paper profits than necessary.

In Summary

  • Donchian Channels usage along with other indicators can reduce the number of false trading signals
  • A few simple trading strategies using the Donchian Channels are:
    • MACD
    • Volume Oscillator
    • Stochastic Oscillator+ Moving Average

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    Donchian Channel Indicator MT4 | Free Download

    The Donchian Channel Indicator for MT4 is a very well-known technical indicator.

    The Donchian Channel was one of the indicators used in the famous Turtle trading strategy.

    Primarily, this indicator is a trend following indicator and was intended for use on larger time frame charts.

    The indicator plots the high and low lines for a set period of time.

    Donchian Channel Indicator: When to go Long?

    When to go long using the Donchian Channel Indicator?

    Wait for the Donchian Channel Indicator to turn horizontal for a few candlesticks.

    Following this, take a long position when price breakouts above the upper horizontal line that is plotted by the Donchian Channel Indicator.

    When to exit your long positions?

    Exit long positions when price begins to move back to the lower Donchian channel, assuming that the trend has been up.

    You can also trade with a fixed risk to reward set up.

    Donchian Channel Indicator: When to go short?

    When to go short using the Donchian Channel Indicator?

    Wait for the Donchian Channel Indicator to turn horizontal for a few candlesticks. Following this, take a short position when price breakouts below the lower horizontal line that is plotted by the Donchian Channel Indicator.

    When to exit your Short positions?

    Exit the short positions when the price moves back to the upper Donchian channel line. This is assuming that there has been a strong downtrend for a few periods.

    Where to set the stop loss?

    The stop loss is set near the recent pivot low or high point depending on whether you are long or short in the market. You can also set your stop loss to the upper or lower Donchian channel and trade until you get stopped out.

    Conclusion

    The Donchian Channel Indicator is relatively simple to use and understand technical trading indicators.

    It is best advised to use the Donchian Channel Indicator alongside other technical indicators to gain additional market confirmation before you trade.

    How to Increase Your Winning Ratio with the Donchian Channel Indicator MT4 ?

    When you add the Donchian Channel Indicator and use it together with a proven trend trading system like the Elite Swing Trader or Simple Trend Trading System, you can only expect to achieve a better win ratio and better risk-reward ratio.

    Technically speaking, you can use this MT4 indicator for all time frames.

    4 ВЗРЫВЧАТЫЕ ПОСРЕДНИКИ ДЛЯ ТОРГОВЛИ С ДОНЧИНСКИМ ПЛАН

    However, the shorter the time frame, you will see more fluctuation and possibly more whipsaw which may cause small losses that can eat up your portfolio quickly.

    We recommend that you use higher time frames like the H4 or even higher for better consistency.

    How to Install Custom Indicators on MT4 on Windows

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    We hope you have enjoyed this post as much as we have created this strategy post for you.

    Показателят за двоични опции Donchian Channels (показател Канал Donchian)

    Дори и в далечното седемдесетте 20 век, известният търговец Richard Donchian разработила собствена показател за технически анализ, Този индикатор тенденция, която работи на базата на коридора на цените.

    Знам, че тези «коридор» Индикатори Binary Options много популярен сред нови търговци. Те са лесни за разбиране и прилагане, и процентът на рентабилните сигнали винаги са високи. И вече се опита, търговци успешно съчетават тези инструменти с други показатели, за да се подобри качеството на своите прогнози.

    Нека да видим как Donchian Канал Indicator Тя изглежда по-жива графика:

    Indicator Donchian Channels Тя показва на две криви линии, които формират коридор на цените. Горната граница — съпротивлението на линията, долната граница — подкрепа на линия. Техните граници — високи и ниски цени. Канал Donchian тъй като тя се движи около график, тя винаги е вътре.

    Donchian Channels индикаторни сигнали на живо чарт :

    — Трябва да се намери точката на разбивка на коридора на цените. Но това не се случва визуално, защото линията на канала през цялото време около цената на актива и пробата не надхвърля тях. Разбивката на условно. I е маркиран на снимката по-горе.

    — Ако има разбивка на по-ниска граница, тогава опцията е отворен PUT И обратно, ако има разбивка на горната граница, е необходимо да отворите опция CALL .

    Време на физически упражнения е най-добре да се избере по-2 4 искра предварително.

    Както всички подобни канални индикатори, Dolchian Channels също страда от наличието на фалшиви сигнали в резултат на прекъсвания на границата поради високата волатилност на пазара. Поради тази причина препоръчвам да се използват допълнителни инструменти за индикатори, както и модели за анализ на свещи.

    Първата опция за филтриране е да се запечатат два канала Donchian на графиката едновременно, но първата ще бъде с период в 20, а вторият ще бъде по-широк с период от 55.

    Този подход към стратегията на Дончианския канал беше използван от търговци, които получиха името «костенурки» заради техния стил на търговия. Но такава тактика по никакъв начин не е подходяща за търговия с бинарни опции. Но на фондовия пазар и Forex, той показва отлични резултати!

    В допълнение към двата Donchian канала с периоди 20 и 55, препоръчвам добавяне на Индекс на относителната сила RSI и сключване на сделка до края на свещта по часовата рамка.

    Сделката за увеличаване с такава стратегия трябва да се сключи само когато свещта пробие нагоре и двата горни канала, а индексът RSI е над средното си ниво в 50. Кратките сделки се правят по същия начин, но точно обратното.

    Този индикатор е по-подходящ за използване в комбинация с тенденционни стратегии. Но за търговията в апартамента ефективността му вече е значително намалена. Това обаче ще бъде удобно допълнение за начинаещи, които все още не са се научили как сами да изграждат линии за подкрепа и съпротива.

    Donchian Channels

    Donchian channels were developed by Richard Donchian, a pioneer of mechanical trend following systems. The two outer bands are plotted as the highest high and lowest low for a set period, originally 20 days, with the optional middle band calculated as the average of the two.

    Donchian Channel Trading Signals

    The system is only suitable for trending markets.

    Donchian’s Four Week Rule

    Go long when price crosses the upper Donchian Channel (the four week high if 20 days is used).

    Go short when price crosses the lower Donchian Channel.

    If trading futures, roll forward any open positions into the next contract on the last day of the month preceding expiration.

    The objective is to enter the trend on a breakout and to ride the trend for as long as possible, avoiding shakeouts.

    Turtle Trading

    Curtis Faith in his book Way Of The Turtle describes a variation of the Donchian system used by the legendary Turtle Traders.

    Enter long when price crosses above the 20-Day upper Donchian Channel and exit when price penetrates a 10-Day lower Donchian Channel.

    Enter short when price crosses below the 20-Day lower Donchian Channel and exit when price penetrates a 10-Day upper Donchian Channel.

    Use the 25-Day/350-Day exponential moving average as a trend filter. Go long only if the 25-Day EMA is above the 350-Day exponential moving average and go short only where below the 350-Day EMA.

    The system also uses ATR trailing stops with a multiple of 2. Faith, however, demonstrates that replacing the 10-Day Donchian Channel and ATR stops with a simple time-based exit, where all trades are exited after 80 days (16 weeks), achieves similar results — with no stop losses at all.

    Example

    Goldman Sachs displays the Turtle Trading settings for an up-trend, 20-day upper and 10-day lower Donchian Channels, with 63-day exponential moving average as an added trend filter.

    Mouse over chart captions to display trading signals.

    1. Go long [L] when price crosses above the upper Donchian Channel while above the 63-day exponential moving average
    2. Exit [X] when price crosses the lower Donchian Channel
    3. Go long [L] when price recovers above the upper Donchian Channel
    4. Exit [X] when price crosses below the lower channel.

    Donchian Channel Setup

    The default setting for both Donchian Channels is 20 days. The middle line is optional.

    See Indicator Panel for directions on how to set up an indicator — and Edit Indicator Settings to change the settings.

    Donchian Channel Formula

    1. The upper band is calculated as the highest high for the selected period.
    2. The lower band is calculated as the lowest low for the selected period.
    3. The selected period does not include the day on which the band is plotted (otherwise the band would never be crossed). For example, the 20-Day Donchian Channels for today are the highest high and lowest low for the preceding 20 trading days.
    4. The middle line is calculated as (Upper Band + Lower Band) / 2.

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    Donchian Channel Evaluation

    Donchian Channels and the Aroon Oscillator give identical signals. Aroon records 100% when price breaks the Donchian Channel. Readers should choose whichever format they feel most comfortable with.

    Donchian Channels vs Bollinger Bands: Which is Better?

    At face value, Donchian Channels looks a lot like a Bollinger Bands and may be perceived as operating identically to it. While Bollinger Bands are useful trading indicators that are widely known and used by traders in all types of security markets (such as – stocks, Forex, and cryptocurrencies), Donchian Channels can offer comparatively more reliable trading opportunities depending on the trading scenario and your trading strategy. But is one indicator better than the other?

    It depends on the nature of the market one is trading in, the asset and its volatility, the trading strategy, and the risk tolerance of the trader. In cases where the market volatility is high and/or the trader has moderate to high-risk tolerance, Bollinger Bands will prove to be a better trading indicator.

    Bollinger Bands are dynamic, react faster, and are agile to use for high volatility assets.

    But the opposite is also true: there are situations where you should choose Donchian Channels over Bollinger Bands. So, which situations should you be more inclined to use one as opposed to the other? In the remainder of this article, alongside discussing the key similarities and differences between the two indicators, we’ll discuss those conditions in detail.

    Table of Contents

    Similarities and Differences Between Donchian Channels and Bollinger Bands

    Before deciding which indicator is best suited for your market, trading asset, and trading strategy, it is vital to first understand the key similarities and the key differences between the two indicators.

    Therefore, let us identify the key areas of similarities and differences between the two indicators.

    Similarities Between Donchian Channels and Bollinger Bands

    There are three main similarities between the Donchian Channels and the Bollinger Bands. These are:

    1. Indicator Appearance
    2. Volatility Measurement
    3. Indicator’s Response to Volatility Changes

    Now, let us further expand on these three areas of similarities in a bit more detail.

    Similarity-1: Indicator Appearance

    Indicator Appearance is the most noticeable commonality between the Donchian Channels and the Bollinger Bands. Both Indicators comprise of three bands – the upper, the lower and the middle band. Hence, to the eyes of a novice trader, both these indicators look exactly the same.

    Similarity-2: Volatility Measurement

    Both indicators, Donchian Channels and Bollinger Bands, measure the volatility of the security market that is being analyzed. A trading security is considered volatile when it records rapid fluctuations in price. Similarly, a trading security with less fluctuations in its price is considered to be less volatile.

    Similarity-3: Indicator Response to Volatility Changes

    With both indicators, an expansion would indicate an increase in volatility and a contraction would suggest the opposite, a decrease in volatility.

    Therefore, a Donchian Channel will expand when the security market becomes more volatile and contract in the opposite case. Likewise, the upper and lower Bollinger Bands will either expand outward from the middle band or contract closer based on whether volatility is increasing or decreasing, respectively.

    Differences Between Donchian Channel and Bollinger Bands

    The main difference between the Donchian Channels and Bollinger Bands is that Donchian Channels represent volatility using high and low prices. In contrast, Bollinger Bands rely on the standard deviation from the mean. This means that, where Bollinger Bands will smooth out the range to account for outliers, a Donchian Channel will not and could potentially give an interpretation of the market volatility that is affected by the outliers (unusual fluctuations in price) and not be as accurate.

    Additionally, Bollinger bands show the dispersion from the mean (the average of the price for a given period), whereas the Donchian Channel shows the actual market range.

    That being said, there are three key differences between the Donchian Channel and the Bollinger Bands. These are –

    1. Indicator Calculations
    2. Relationship between Indicator Bands
    3. Breakout Interpretation

    Now, let us further expand on these three areas of differences between these two indicators.

    Difference-1: Indicator Calculations

    The Donchian Channels record the highest highs and the lowest lows of a price over a given period. But Bollinger bands plot the difference of two standard deviations (under default indicator setting) from the simple moving average of the price data for the period. This means Bollinger Bands make provisions to account for outliers and prevent them from skewing the data analysis.

    Difference-2: Relationship between Indicator Bands

    The upper and lower lines (or bands) in a Bollinger Bands indicator are calculated using the middle line of that indicator:

    Upper Channel = Middle Channel + 2 Standard Deviations

    Lower Channel = Middle Channel – 2 Standard Deviations

    The opposite is true for the Donchian Channels indicator in which the middle line is rather calculated by taking an average of the upper and lower lines:

    Middle Channel = (Upper Channel – Lower Channel) / 2

    Difference-3: Breakout Interpretation

    When price breaks outside of the upper or the lower channel, it has different interpretations for trading using the two indicators.

    In the case of Bollinger Bands, a breakout outside the upper or the lower band indicates a potential reversal in trend. A breakout in the price above the upper band of Bollinger Bands suggests that perhaps the market has been overbought and is due to bounce back. Likewise, when the price of the asset breaks below the lower band of the Bollinger Bands, it indicates that prices have fallen too much and are due to bounce back.

    But, the same is not true for the Donchian Channel. In the case of Donchian Channel, a breakout is indicative that the price has broken out of its recent trading range and a new trend may be developing. If the price of the asset breaks above the upper band of the Donchian Channel, you go long because an uptrend could be developing. Again, if the price breaks below the lower band of a Donchian Channel, a downtrend could be developing, so you go short.

    When Should You Choose Bollinger Bands Over Donchian Channel?

    When it comes to application in trading, both Bollinger Bands and Donchian Channels have their own strengths. There are three trading scenarios in which Bollinger Bands will give you better results than the Donchian Channel. These are:

    1. Early Trade Entry and Exit Signals
    2. Trading High Volatility Assets
    3. Higher Number of Trading Opportunities

    Now, let us discuss each of these three scenarios in a bit more detail.

    Scenario-1: Early Trade Entry and Exit Signals

    Bollinger Bands will position you better than the Donchian Channels in making early trade entries. This is because this indicator reacts quicker to the changing market, thereby providing traders with an early trade signal. For this very reason, Bollinger bands are also better suited for tracking markets that have rapidly changing trends. The moving average used in Bollinger Bands provides further support in determining the trade entry and exit points.

    Scenario-2: Trading High Volatility Assets

    Bollinger Bands will also prove to be a better indicator of choice when trading high volatility assets. Donchian Channels do not include the current price of an asset in their calculation to produce the upper, lower, and middle bands, but instead, rely on the previous rates of the asset in the market. This can be detrimental to trading a highly volatile asset because the most recent price is an important indicator in such markets.

    Besides this, Donchian Channels are not inherently designed to deal with highly volatile assets. Their creator, Richard Donchian, was a conservative trader, and he did not create this indicator with the intension of using it for analyzing highly volatile assets. Bollinger Bands, however, are well equipped to do so and are dynamic in being able to adjust to highly volatile asset markets.

    Scenario-3: Higher Number of Trading Opportunities & Dynamic Trade

    If you are an active trader or a scalper looking to profit from every trading opportunity that the market presents, Bollinger Bands would better suite your trading personality. Since this indicator reacts quickly to the price changes in the market, it tends to provide more trading opportunities.

    When Should You Choose Donchian Channels Over Bollinger Bands?

    Bollinger Bands have many advantages over Donchian Channels, but there are several situations under which the Donchian Channels can prove to be a superior indicator. The two trading scenarios under which the Donchian Channels will deliver better trading results than Bollinger Bands are –

    1. Risk-Averse Trading
    2. Trading Choppy Markets

    Now, let us cover both these market conditions in a bit more detail.

    Scenario-1: Risk-Averse Trading

    Donchian Channels are the ideal choice for the risk-averse trader. Bollinger Bands are dynamic indicators that react quickly to the changing market conditions. Hence, Bollinger Bands inherently come with more risk. In scenarios where your risk appetite as a trader is low, Donchian Channels will be better suited for your trading psychology.

    Scenario-2: Trading Choppy Markets

    Even though Bollinger Bands allow for early entry, but they are also more likely to give a false trade signal in scenarios where the price fluctuations are short-lived. Therefore, if you are trading in a market that is “choppy” or a market that does not have a clear direction, the possibility of getting a false trading signal with using Bollinger Bands is very high. Hence, I would recommend against using Bollinger Bands in such trading conditions.

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    In such trading scenarios, Donchian Channel will give you much better insights that will help you isolate the major trends from sideways market movement. Hence, for that reason, Donchian Channel is a better indicator to use when trading choppy markets.

    Conclusion

    To recap, the Donchian Channel and Bollinger Bands are both chart indicators that are commonly used by technical traders to make trading decisions. These indicators exhibit several similarities but are very different from one another. Deciding which of the two indicators is better suited for your specific trading needs will depend on many different factors such as your trading strategy, the asset you wish to trade, and the nature of that asset’s market.

    It is also important to note that no indicator should be used in isolation to analyze the market. Instead, any indicator should only be a cog in the overall wheel of your trading strategy.

    For optimum results, it is important that you combine various chart indicators with other complementary tools/analyses, and use the collective insights from that combination in making your final trading decisions.

    DMC Donchian Channel

    Donchian Channels are three lines generated by moving average calculations that comprise an indicator formed by upper and lower bands around a mid-range or median band. The upper band marks the highest price of a security over N periods while the lower band marks the lowest price of a security over N periods. The area between the upper and lower bands represents the Donchian Channel. Career futures trader Richard Donchian developed the indicator in the mid-twentieth century to help him identify trends. He would later be nicknamed «The Father of Trend Following».

    What Do Donchian Channels Tell You?

    Donchian Channels identify comparative relationships between current price and trading ranges over predetermined periods. Three values build a visual map of price over time, similar to Bollinger Bands, indicating the extent of bullishness and bearishness for the chosen period. The top line identifies the extent of bullish energy, highlighting the highest price achieved for the period through the bull-bear conflict. The center line identifies the median or mean reversion price for the period, highlighting the middle ground achieved for the period through the bull-bear conflict. The bottom line identifies the extent of bearish energy, highlighting the lowest price achieved for the period through the bull-bear conflict.

    The Difference Between Donchian Channels and Bollinger Bands

    Donchian Channels plot the highest high and lowest low over N periods while Bollinger Bands plot a simple moving average (SMA) for N periods plus/minus the standard deviation of price for N periods X 2. This results in a more balanced calculation that reduces the impact of big high or low prints.

    Limitations of Using Donchian Channels

    Markets move according to many cycles of activity. An arbitrary or commonly used N period value for Donchian Channels may not reflect current market conditions, generating false signals that can undermine trading and investment performance.

    Buffers: There are three buffers, 0 = Upper channel, 1= Middle Channel e 2= Lower Channel.

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