Home Forex Trading Strategies Forex Basic Strategies Using the Donchian Indicator to Trade Price Channels

Using the Donchian Indicator to Trade Price Channels

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Trading is a game where one side makes money, and another loses; it’s the one bad decision of one trader that is a benefit for another trader. Trading is a game of all about making the decisions and sticks with them. The biggest problem traders ever face is deciding to buy or sell but often failed to pull the trigger. There is a cause behind this effect of failing to make a decision. Because traders don’t have a well-proven trading strategy, which class apart from them from the rest of traders, we will share our well-proven trading strategy to trade the markets in this article. Master this strategy well on demo to let go of the fear of taking action.

DONCHIAN CHANNEL

Donchian channel is a technical analysis tool created by Richard Donchian in the mid-twentieth century to identify the market trend. It is a moving average indicator that exactly looks like the Bollinger Bands. This indicator consists of three lines created by the calculations of the moving averages. The upper band of the indicator marks the highest point of an asset over the N period. In contrast, the lower band marks the lowest point of the asset over the N period; the area between the indicator is known as the Donchian channel. The upper line identifies the bullish energy highlighting the buyers’ price, and the lower line identifies the bearish energy highlighting the price achieved by the sellers. The median band indicates the buyers and seller energies trying to dominate the game on either one side.

PRICE CHANNEL

We witnessed the price channel on the chart when an asset’s prices become bounded between the two lines. You will witness the price channel in trending market conditions, and it is also termed as an ascending, descending channel. Traders often use price channels to gauge the market momentum and direction of the underlying security. When the prices approach the lower channel, it means the prices approached the major supply area and expect the price rise, and when the prices approached the upper demand area, it means the prices approached the demand area and expect the drop in prices.

TRADING STRATEGIES

The image below represents a couple of buying and selling trades using the price channel and Donchian Channel. The idea is simple, wait for the price action to touch the lower channel line and Donchian line to take buy and for taking the sell, let the prices touch the upper channel and Donchain upper line to go short. The below trades belong to the 240 charts, so each trade ends up milking more than 50 pips. Most traders use this strategy on a lower timeframe, but it is even more beneficial if you find it on a higher timeframe.

USING THE PRICE CHANNEL AND DONCHIAN INDICATOR TO TRADE WITH THE TREND

If you are not the aggressive one and you are a conservative trader, then simply this trading approach is beneficial for you. The idea is to let the prices resume inside the price channel and check the market trend. If it is down, then only look for selling trades and ignore the buying trades and whenever the market gave you the selling opportunity, scale your trades.

FOR SELLING

As you can see in the image below, the market was in a downtrend, and we took three selling trades. The first trade prices were inside the Donchian channel, and the price channel was also indicating the sell. We choose to scale our trade in the second trade, but it failed to print the brand new lower. The third trade was also the scaled one, which ends up printing the lower low. The stop-loss order for each entry should be above the price channel and for booking profit, always choose brand new lower low or when the market resumes the opposite trend.

FOR BUYING

The image below represents a couple of buying trades in the GBPAUD forex pair. The below image is a daily chart which was in an uptrend from the last couple of years. The price channel appears at the end of the market trend, a final phase of the ongoing trend. As you can see in the below image overall, we got the five buying trades in the market, and all of these trades end up giving us a good amount of profits. We choose to scale on each trade, and within the eight months, all of our trades end up milking nearly five thousand pips.

USING THE PRICE CHANNEL TO TRADE THE REVERSALS

As you know, channels appear at the end of the trend or are the final phase of the trend. When the price channel approaches near the higher timeframe resistance or support level, it is a time for you to get ready to trade the reversals. If the price channel’s momentum is completely choppy near the major resistance or support area, it is a clear sign of an upcoming reversal.

The image below represents the reversal trade. The purple line was the higher timeframe resistance area where sellers failed to go down, and buyers took the lead. When the prices approached the support area and the Donchian price channel, both indicated the buying trade. We took the first entry at the main level, and for the second entry, we let the price action break the channel. The hold above the channel line was a sign of buyers in the show, and long will be beneficial.

CONCLUSION

The purpose of creating the Donchian indicator is to identify the market trends and the price channels telling us the ongoing trend is soon going to end. By pairing these both tools, one can easily identify the trending market trades. There are so many different or complex ways to use these tools, and the above-shared strategies are one. We choose the simple approaches to use these tools because the goal is to make money, and some complex trading strategies are not easy to master.

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