The Donchain channel indicator is one of the quite popular technical indicators in the market. It is developed by Richard Donchian in the mid-twentieth century. This indicator consists of three moving average lines calculated by the highest high and lowest low of the last ‘n’ period. The upper Donchian band marks the highest price of the security over the ‘n’ period of time, whereas the lower band of the indicator marks the lowest price of a security over the “n” period of time. The area between the upper and lower band represents the Donchian channel.
If the price action is stable, the Donchian channel stays in a narrow range, and in volatile market conditions, the Donchian channel indicator will be wider. In this way, the Donchian channel is a wonderful indicator to assess the volatility of the market. The upper Donchian band indicates the extent of bullish energy, highlighting the price action achieved a new high in a particular period. Whereas the centerline of the indicator identifies the mean reversion price for a particular period. The bottom line identifies the extent of bearish energy, highlighting the lowest price achieved by the sellers in a fight with the buyers.
Below is how the price chart looks once the Donchain Channel indicator is plotted on to it.
Trading Strategies Using The Donchain Channel Indicator
This strategy is made for traders who prefer to make quick bucks from the market. By following this strategy, we can get a couple of trades in a single trading session. The idea is to go long when the price action hits the lower band and go short when the price hit the upper band. The preferred time frame will be a 5- or 3-minute chart.
The image above represents a couple of buying and selling trading opportunities. Scalping is the easiest way to make quick bucks from the market. When we take a buy or sell trade, and if the price action goes five pip against your entry, we suggest you close the trade and wait for the price action to give another trading opportunity. Book the profit when price action hits the opposite band of the indicator.
Donchain Channel To Trade The Trending Market
If the market is in an uptrend, it is advisable to go only for the buy trades, and if it is in a downtrend, only go for sell trades. In this way, we can filter out false trading opportunities, and by following the trend, we can easily hold our position for longer targets.
The below image represents two buying opportunities that we have identified in the EUR/NZD pair. We can see that the trend was up, and if we take any of those small sell trades, we will end up on the losing side. So on a higher timeframe, it is advisable to trade with the trend. We have captured the whole buying movement in this Forex pair. This is the easiest and safest way to trade the market using this indicator
The below image represents a couple of selling opportunities in the CAD/JPY Forex pair. We can scale our positions when the market gives an opportunity to do so. Or, we can close our positions when the opposite signal is triggered. Always wait for the desired signal with patience to trade the market.
The advantage of trading with the trend is that whenever the market gives us the trading opportunity, we can easily hit the trade without worrying much. Another advantage of trading with the trend is that we can go with a smaller stop-loss as the price action spikes very less in a trending market.
These are only a few applications of the Donchain Channel Indicator. You can follow our strategy section to learn many advanced applications of this indicator. Stay tuned to learn many more technical indicators. Cheers!