Donchian channel strategy

This is suitable for traders who are looking to make quick profits by capitalizing on short-term price movements. Donchian channels are used to show volatility, breakouts, and potential overbought/oversold conditions for a security. The Donchian system uses adjustable bands that are set equal to the n-period’s highest highs and lowest lows across a moving average. The upper and lower bounds of a Donchian channel can also form effective support and resistance levels, particularly when used in combination with other technical indicators.

Donchian channel strategy

Hi Mate, does this work in choppy markets like BTC and on shorter time frames like 30 mins / 5 mins etc? I had a few good breakout trades with it but its hard to judge because the previous high or low band is sometimes 100s of dollars away so it can be difficult to see a break. TrendSpider is a suite of research, analysis, and trading tools (collectively, the “platform) that are designed to assist traders and investors in making their own decisions. Our platform, its features, capabilities, and market data feeds are provided ‘as-is’ and without warranty. The Donchian Channel, created by Richard Donchian, plots a line at the high and low price of an asset over a set period of time, typically using candlesticks as a timepiece.

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The opposite also applies; there is massive bearish pressure when the indicator is sloping downwards, and prices are hugging the lower band. When it is relatively flat, the upper and lower bands serve as breakout lines. If prices rise to the upper band and manage to rise above it, it would be a signal that a bullish breakout has occurred in the market. Similarly, if the prices drift towards the lower band and below, it would be a signal that a bearish breakout has occurred.

  • In this article, we’ll take a closer look at the Donchian Channel and explore different trading strategies that traders can use to take advantage of this versatile indicator.
  • Hi Mate, does this work in choppy markets like BTC and on shorter time frames like 30 mins / 5 mins etc?
  • Traders will maintain a long position to see if the price reaches the upper band.
  • False breakouts have been marked with a red (x) and successful breakouts with a green tick.

Donchian Channels are a channel-based technical analysis trading strategy used as an indicator for trading in financial markets. The indicator is primarily used by traders to identify potential breakouts and retracements. A breakout is a rise in a security’s price above a resistance level (previous high) or a drop below a level of support (previous low). It’s worth noting that breakouts can result in false signals, and it’s important to use additional technical analysis tools to confirm the strength of the breakout and the trend direction. A shorter time period, such as 20 days, will be more sensitive to price changes and can identify shorter-term trends and breakouts.

Donchian Channel Trading Strategies

Especially for breakout and trend-following traders, there is a specific position sizing strategy that can help you improve the quality of your system even further. Whenever price is above the 100-period moving average, you would only look for breakouts to the upside; and when the price is below the 100-period moving average, you only look for short breakouts. The Donchian Channel is designed to provide a graphical illustration of price behaviour. The upper band is used to gauge the underlying bullish energy of the price, whereas the lower band shows the underlying bearish pressure of the price. The median band is essentially a centreline, and it is used to identify when a trend can resume after a retracement, or when there is a potential trend reversal in the market.

  • You can also design your own strategies by testing out the indicator in a demo account first.
  • The reversal is usually confirmed when the price of an asset moves above or below the middle line.
  • If the price breaks above the upper band (20-week high), you go long.
  • Candlesticks, so called because of their shape, are plot areas on charts that demonstrate the open, high, low, close price, and time frame of a given stock.

When it comes to trading in the financial markets, there are countless strategies and indicators that traders use to analyze the markets and make profitable trades. One such strategy is based on the Donchian Channel, a technical indicator developed by Richard Donchian in the 1970s. Play around with the indicator settings to find parameters that align with the market in which you are trading.

What are Donchian Channels?

Use a longer-period Donchian Channel for entries, such as the 20-period, then use a smaller period, such as a 15, for exits. This might require having two Donchian Channels displayed at the same time. Having two sets on the screen may make it hard to read and appear cluttered, so apply different colors to the different channels to distinguish them from each other. While the Donchian Channels look at the high, low, and the average, calculating the Bollinger Bands is relatively long. When you apply it, the chart will look a bit cluttered because of the six lines.

Short sell when the price falls above the lower band of the longer period channel, and exit when the price rises above the upper band of the shorter period channel. It is calculated by first identifying a moving average of a certain period. After that, you calculate the positive and negative standard deviation of this average. Another thing you need to observe is the flattening of the upper and higher lines during a trend. When this flattening happens, it is usually a sign that the reversal is coming. The reversal is usually confirmed when the price of an asset moves above or below the middle line.


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