The Donchian Channel, created by Richard Donchian, plots a line at the high and low price over a set period of time, typically 20 price bars.
Day traders apply the indicator to their charts. The channels overlay the price action, showing the highest and lowest prices as continuous lines over the specified number of price bars, regardless of whether viewing a tick, 1-minute, 5-minute, or any other chart time frame.
Donchian channels are useful for highlighting trends as well a ranging periods. Several strategies have been developed based on Donchian channels, but day traders can also come up with their own, as the indicator is quite simple and can used in many ways.
It is called a "channel" because there are two lines to the indicator--one which runs along the highs of price bars, and another that runs along the lows. There is also the option to add a third line between the upper and lower lines.
How To Use The Donchian Channel For Breakout And Trend-Following Traders
This third line is an average of the upper and lower channel lines bands. Donchian channels can be applied to any market, such as forex , stocks, options or futures charts.
The upper and lower bands are plotted at the highest and lowest price over a specified number of periods, such as 20 price bars. The indicator does not include the current price bar in the calculation.
In other words, if you choose to apply the indicator over 20 price bars, the bands are calculated and plotted based on the 20 prior price bars. The attached chart shows an example of Donchian Channels applied to a 1-minute stock chart. There are many ways to use Donchian channels, and you can develop your own Donchian Channel strategies, or incorporate the indicator into your current strategies if it improves the performance of your trades.
The strategy above is the most basic, but variations are recommended to make the strategy more effective. Play around with the indicator settings to find parameters that align with the market you are trading. The channels should help you isolate when potential trends are starting or ending. No indicator will work all the time. Adding another indicator to help filter out some of the trades can aid in this regard, as can using a shorter period Donchian channel to signal an exit.
Successful trading always comes down to testing out strategies before you use them with real capital.
Using The Donchian Bands | nocuwahojopyx.web.fc2.com
Establish your strategy, test it out over many trades and days, and only if it works for you should you proceed to using it with real capital. Search the site GO.
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