donchian channel – Forex Academy

Introduction

Scalping is a trading strategy designed to profit from small market changes. The Scalpers took a couple of trades in any trading session, and the goal of every scalper is to seize gains when they appear on a price chart because the aim is to have a few small wins rather than one large one. Scalping is one of the most challenging style of trading to master because it requires unbelievable discipline and focus.

A scalper must follow the rules of their trading strategy like a religion because one large loss can easily wipe out dozens of successful trades. One of the most critical aspects of scalping is liquidity because we would not scalp any instrument that is not liquid enough and ensuring liquidity also ensures that we are getting the best price while entering and exiting in a trade. In this article, we will show you how to scalp the 15-minute trading timeframe by using the Donchian Channels Indicator.

Working Of A Donchian Channel

Donchian channel consists of three lines, which are generated by the moving average calculations that comprise an indicator formed by the upper and the lower band, also the median band. The celebrity trader Richard Donchian developed the indicator in the mid-twentieth century so that he can identify the trend of the market. The area between the upper and lower band represents the Donchian channel. The indicator identifies the bullish and bearish extremes areas, which are followed by the reversals or breakouts in price action.

15-Min Trading Strategy

The scalping strategies are only created to trade the lower timeframes, such as 1, 3, 5, 15-minute timeframes; do not apply any of these strategies on any higher timeframes; otherwise, you will face some trouble in your trading.

As you can see in the below image of the USDJPY forex pair, overall, the instrument is in a strong uptrend, and when the price action hits the lower band of Donchian channel it indicates the buy trade, and when it hits the upper Donchian channel, it means to go for a short trade.

In the below image the price action gives us three buying and three selling trade, most of the time the buying trades perform bit longer than the selling trades, it is because the flow of the market was up, but for the scalpers, the flow doesn’t matter, all the scalpers want is to in and out from the market. Close your position when the price action hits the opposite channel, and when you take the entry, if the price action goes a bit against you { for, e.g., 4 to 5 }, then close your position immediately and wait for the new signal.

The below image represents a couple of buying and selling trades in a downtrend. The goal of every scalper is to, first of all, check the trend of the market, and expect more trades by following the trend and simply expect less counter-trend trades. You can see that the below image of the GBPNZD forex pair shows us the nine selling and six buying trades. Most of the selling and buying trades worked very well, and each trade generates a significant amount of money for us. The whole goal is to activate the position when the price action hits the Donchian channel and close your position when the price action goes a bit against us.

Range Trading

If you trade the trending market, then expect the more trend-following trades, and if you scalp the ranges and channels, then you can expect both the buying and selling trades because in ranges and channels both of the parties hold the equal powers this is the reason ranges and channels are favorite for the scalpers. The image below shows the 15-minute chart of the NZDJPY, forex pair, which shows the ranging market, and in range price action gives the five selling and four buying trades. In the ranging market, we suggest you go for the 1:1 RR trades because the price action more often spikes in ranges.

Scalping Trading By Following The Market Trend

Buy Trade

The scalping is all about having a strong and aggressive mind to face the rollercoaster ride in the market, and some of the conservative and confirmation traders want to scalp the market, but they little hesitate to react on every signal, so if you are a conservative or confirmation scalper then here is good news. We specially created a strategy that suits your trading personality. In this strategy, you will find fewer trades, but the trades will be accurate. Apply this strategy only on the fifteen-minute timeframe and avoid trading the ranges and channel markets because both situations have higher chances of fake outs. First of all, on a lower timeframe, find out the clear uptrend in any instrument, and when the price action hits the lower Donchian channel go long and hold your position till the price action hits the opposite channel. Do not go for selling trades in the buying market simply wait for the next buying trade. In the below image, by following the trend of the market, we only got the five buying trades in the EURAUD forex pair. Each of our trade travels a significant amount of time; then the price action generates the next trade. By following this strategy, you will face less mess and good trades in the market.

Sell Trade

The image below represents the six selling trades in the GBPUSD forex pair, you can see that the downtrend was quite smooth, and after activating our every trade, the price action immediately goes into our favor. In the strong trending market, you can go for the smaller stop loss and book profit when the price action gives the buying signal.

Conclusion

Scalping is not easy, but it is a quick way to make some money from the market. As a scalper does not expect a continuous win, most of the scalpers face the ups and downs in their trading journey. Every trading day awaits a couple of buy and sell trades, do not judge yourself or your strategy according to every single trade, instead of at the end of the day find out how many wins and losses you have. If the end of you have more wins than the losses, then it means you have a successful trading day. Scalping works very well on the lower timeframe and the strategies we show in this article created, especially for the 15-minute trading timeframe.

Turtle soup

As Newton found out, an action carries its reaction. The market found a solution to profit from these anticipated turtle breakouts: Turtle Soup.

Larry Connors and Linda Bradford Raschke wrote a beautiful book called Street Smarts, filled with many ideas to swing trade.

The method that Connors and Raschke propose looks to identify those times when a breakout fails and jump aboard to catch a reversal. By the way, this strategy can be traded in all markets and time frames.

The Turtle Soup rules for long positions (the inverse goes for short positions):

The market must make a 20-period low. The lower, the better.
The previous low must have happened four periods earlier.
After the market fell below the 20-period low, we place an entry buy-stop five ticks above the previous day low.
If the buy-stop is filled, buy a stop-loss some tics under the current period low.
Use trailing stops, as the current position is moving profitably.
Re-entry rule: if you’re stopped out, you may re-enter at your original entry price if this happens in the next two bars.

Turtle soup plus one

This strategy is identical to the Turtle Soup, except it happens one day later.

This strategy is more conservative, as it waits for the current bar to end, and sets the buy stop at the same place, but one bar later.

To show that two radically different ways to trade are both valid, I’ve tested this strategy from mid-2006 up to Jan 2018.

As we observe above, the strategy’s percent winners are about 23%, but with a Risk/reward factor- which is the average win to the average loss ratio- of 3.77. Please note, also, that the average trade is rather small. That is the result of a short timeframe.

To achieve those values, we used a trailing stop of 0.22%

Main metrics of the naked Turtle Soup Donchian fading System, on the EUR-USD:

Conclusions:

The system is good. The reward to risk ratio is great, but it is hard to take just one successful trade every four trades.

The system could be much more profitable if we can assess when the asset is in a trading range, apply it only when this condition happens, and avoid trading it during prolonged trends. This can be done using a filter that allows only propper trades. For example, trading only when the ±1 STD Bollinger bands (see figure below- BB bands in cyan) are shrinking in size, and its centerline goes flat. We should avoid the trade when the Bollinger bands start expanding with its center curving up or down. That would ensure a much higher success ratio.

How to use Metatrader 4 to trade this strategy:

The Donchian Channel indicator can be directly downloaded to your MT4 from:

https://www.mql5.com/es/market/product/4782

When clicking download, a pop-up window appears:

Clicking “Yes, I have MetaTrader 4,” the indicator installs directly in your trading platform.

To load the indicator to a chart, on your MT4, go to Insert -> Indicators -> Custom- Donchian Price Channels tfmt4:

Then, a popup window with the parameter selection appears:

And, finally, we get the desired channel surrounding prices:

A sell signal happens at the candle following a close price breaking the channel’s current upper border. A buy signal occurs at the candle following a closing price below the line of the current lower edge of the channel. See figure below three consecutive winners on a flat channel signaled by a Bollinger band contraction.

It’s not usual, but, from time to time, we can expect a streak of up to 10 losing trades. Thus, we have to apply adequate money management rules.

As an example, let’s say you don’t like to have a drawdown higher than 20% of your capital. Then, if you divide that figure by 10, that should be your maximum risk for a single trade. In this case, this is 2% of the current capital allotted to this strategy.

As a final note, the Turtle Soup and Turtle soup plus one are counter-trending systems profiting from false breakouts. Therefore, these systems work best in ranging markets. Bull or bear markets don’t fit well with its counter-trending nature. But they are a very good complement to trend following systems such as the Donchian channel breakout system or similar systems.