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The Donchian Channel & Moving Average Trading Strategy by Sofien Kaabar, CFA Investors Handbook

donchian channel strategy

The Donchian channel is a trend-following indicator which has been heavily used by the infamous Turtle traders. The Donchian channel measures the high and the low of a previously defined range – typically of the past 20 days. The screenshot below shows the channel on Apple with a 20-day range where it marks the highs and lows of a 20 day period. If the price of a security goes above the middle line, this is a signal for traders to make a long position, as it indicates a bullish trend. Traders will maintain a long position to see if the price reaches the upper band.

Now if you can do this consistently, you’ll catch every trend in the market — guaranteed. Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

Calculating Donchian Channels

It’s because they would like to avoid the possibility of trading a false breakout. It’s no wonder that enthusiastic individuals worldwide are looking for new ways, strategies, and indicators to help them achieve their trading goals. There certainly are many reasons why Donchian channels and Donchian channel strategy are among the most common choices of numerous breakout and trend-following traders. Like with all technical indicators the Donchian channel can be subject to false signals from whipsaws and sizeable market swings. Breakouts are very hard to trade, and that is the reason why we prefer to enter on pullbacks.

As such, if it moves below this line, it is a signal that the price is about to retreat. At first glance, it’s apparent that a significant amount of false breakouts exist when momentum is not supporting the move. In the first step, we added the RSI strength and momentum indicator to filter out low-momentum breakouts which are often false breakouts. In the next steps, we show how other tools and techniques can help improve the accuracy of the system. 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.

What if the price breaks through the upper band?

As well as the stock market, Donchian channels are often used within forex trading​, along with other popular trend indicators, such as Bollinger Bands and Keltner channels. This is because the value of currency pairs fluctuate often, introducing short-term price trends, as well as long-term trends of established ‘safe haven’ currencies. But, if the price breaks though the upper band then this could signal a bullish rally, in which an asset’s price could continue to climb for a period.

Can you live off trading signals?

In summary, to live off day trading, you need a profitable and robust strategy to be able to make reasonable returns that can take care of your living expenses. It is even necessary to have different strategies for different market conditions because one strategy cannot work in all market conditions.

Basically, as a swing trader, you’d want to time your entries when the price reaches support and sell it before resistance (and vice-versa for shorting). Besides that, there’s also the option of adding a third line between the upper and lower lines. Remember that the so-called mid-band represents an average of the upper and lower channel lines. 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.

The most versatile indicator — Ichimoku

The channels are often used as a way to enter potentially emerging trends. In one strategy, you can use the indicator to buy long when the price moves above the average line—or short-sell when the price falls below the average channel line. 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.

  • This information has been prepared by IG, a trading name of IG Markets Limited.
  • By calculating the width of the Donchian channels, it provides valuable insights into the range of price movements over a specified period.
  • First, we have a buy signal from the Donchian Channel on May 2nd, 2016.
  • We have identified a buying opportunity at the upper band as per the Donchian Channel on May 31st at $85.07.
  • These bands are calculated using a simple function that identifies the Highest high of the last ‘x’ periods and the Lowest low of the last ‘x’ periods.

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. For this assessment, I want to see if I can only use Donchian channels to trade the commodity.

A trader’s guide to Donchian channels

To determine whether the indicator is suitable for your trading style and needs, let’s go through the indicator’s main advantages and disadvantages. The calculation of the indicator is straightforward and easy to understand even by complete beginners. You should consider using Donchian Channels as they provide an easy-to-interpret map of volatility and trading price history. As you can see, an uptrend happens when the price is along the upper lines of the Donchian and Bollinger Bands. For example, as shown in the chart below, in a strong upward trend, the upper shadows of the price usually touch the upper line of the Donchian Channel.

donchian channel strategy

As you see, we placed our Donchian channels indicator on the existing trend which is visible on the left side of the image. 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. 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.

How to use Ichimoku cloud indicator for day trading?

To apply Ichimoku to a chart in Metatrader, click “Insert”, choose “Indicators”, and pick “Custom”, then “Ichimoku”. In the settings, you can choose values for Tenkan, Kijun and Senkou Span B. You can also adjust the colors the indicator's lines according to your preferences.

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