Donchian channel indicator, Donchian’s channel breakout
Donchian channel indicator, you may have heard the name of this indicator, although this is not available on the default MT4 platform, this indicator is very popular and many traders consider this a profitable indicator.
What discovered this indicator, named Richard Donchian, has a simple form as a dynamic channel.
Donchian channel can be a breakout strategy with high probability.
This indicator can find prices that exceed the number of high or low points.
And the results are quite accurate for trading a certain amount per hour, day, or week.
We can apply this indicator, both in a state of the forex market that is uptrend or downtrend.
But the best time is when the market is in a range-bound.
Well, this time we will review the channel indicator and look for answers on what is a channel breakout system.
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What is the Donchian Channel indicator?
The Donchian channel is a technical indicator that was first used by Richard Donchian to measure price volatility.
This indicator uses the highest and lowest price data with a period of 20 days.
This indicator is similar to the Bollinger band, but the formula is different.
If the Bollinger band takes the standard deviation, the Donchian channel indicator uses the highest price of 20 days and the lowest nutrient of 20 days.
At first, this indicator uses daily timeframes, but many traders also use lower timeframes.
The Donchian channel also has three lines, such as Bollinger band, 20-day upper channel, and 20-day lower channel and the middle line which is the average movement between the upper band and the lower band.
This indicator is a trend following, where price movements will follow the trend.
And in its use, it can be used for the analysis of forex, stocks, crypto and also CFDs.
Upper channel and lower channel lines can become dynamic support and resistance zones.
But in use, they can also be used for trading breakouts.
The most common strategy is the Donchian channel breakout system.
How to calculate
The calculation method for this Donchian channel indicator is very simple.
It only takes the highest price in the “n” period for the upper channel and the lowest price in the “n” period for the lower channel.
The standard time period is 20, but traders can choose other periods for example 30, 50 and so on.
Of course, this period of selection will have an impact on the width of the upper channel and lower channel distances.
For example using a daily timeframe with a period of 20, meaning this takes data for 20 days backward.
If the highest price is $ 125.50, then this will be the upper channel, and if the lowest price is $ 125, this will be the lower channel, while the middle line is between them at a price of $ 125.25.
Usage Donchian channel in trading.
Basically the Donchian channel indicator is to measure volatility, the wider the distance between the upper channel and lower channel means high volatility.
Conversely if the width of the Donchian channel narrows, it means that the condition is flat.
The upper channel and the lower channel can function for support and resistance, but this does not mean absolute.
Because when the trend is strong, the zone can breakout, therefore some traders also use this indicator for trading breakouts.
Donchian channel breakout strategy
Basically, this channel indicator is for trading breakouts, by paying attention to the highest price level of 20 days and the lowest price of 20 days.
That is, entry and stop and reverse at the highest or lowest price level of the 20-day period.
The rule is Donchian channel breakout entry at the highest level or lowest level.
- Entry is carried out at the next candle with the condition that the closing price is now above or below the highest or lowest level.
- Entry buys and exit sell (close sell positions that are still open) if prices have passed the highest level for 20 days (20-day high), or sell and exit buy (close buy positions that are still open) if prices have passed the lowest level of 20 days (20-day low).
- Some traders use the middle line as a breakout point, but this way has a higher risk of vulnerability.
The picture above is one example of applying the Donchian channel breakout system, we can draw conclusions about how to trade.
- Point A: buy entry and close open positions if there are any.
- At Point B: sell and close buy positions that are still open, if any.
- Point D: buy entry and close open positions if any.
- At the point, C does not have to sell because the next bar opening price is above the 20-day low, even though the closing price is now below the 20-day low.
Isn’t that a simple method of trading? but in practice, you might still add other indicators such as RSI or Stochastic to measure overbought and oversold.
But actually, by understanding the concept of the candle pattern.
You can use the upper channel and lower channel as a reference in determining your position.
Apart from that all it is still better to use the position size in accordance with money management and stop-loss placement as well.
Donchian channel as follow trend trading
Using the Donchian channel as a trend following indicator, you can add a moving average period of 200
Here the moving average can be used to see long-term trends.
If the price is above the moving average, then you will only look for long positions.
Otherwise, if the price is below the moving average, then you will only look for short positions.
Donchian channel can function as support and resistance.
If the price is in an uptrend.
Then you will only look for long positions when the price is in the lower channel or middle channel.
Conversely, when the moving average shows a downtrend.
Then you will only open short positions when the price is in the upper channel or middle channel.
In this case, you can use a trailing stop for risk management, if the trend is strong it will provide maximum profit.
In the example image above in the GBPUSD pair, we see the price is above the moving average of 200.
Meaning that the trend is an uptrend.
So we look for long positions at the support level that we can take from the lower channel and middle channel.
For stop loss placement, we can put it below the lower channel.
Because after all the price can change easily, this is only as anticipation.
Donchian channel and MACD
Combining the two indicators has the goal of getting a better signal filter.
Donchian channel indicators can also be combined with MACD.
Previously we have understood how to breakout trading channel Donchian, then with the addition of this MACD indicator can function as a trigger position.
In this case, both must provide signals in the same direction, thus there is no signal contradiction between the two.
The image below is a GBPUSD pair with a Donchian channel and MACD.
From the chart above we get a buy signal from the Donchian channel and also the MACD gives the same signal.
The price at that time was in the upper channel, and there was a break there, while MACD had crossed the MA line to confirm the buy signal.
Donchian channel and the stochastic oscillator
Donchian channels can also be used in conjunction with a stochastic oscillator.
Stochastic is an indicator that includes a leading indicator, which provides oversold and overbought information.
If the price is above level 80 it means overbought, and if it is below level 20 it is oversold.
Then how to trade using the Donchian channel and stochastic?
Look at the image above, we get an overbought signal on the GBPUSD pair, so this is a sell signal from the stochastic.
Then we look at the Donchian channel, after the breakout phase is over, where the price has reached new highs, it is a resistance zone, so this is a sell signal.
Both indicators have reached an agreement by giving sell signals.
For stop-loss levels to adjust to the way you apply risk management, it is recommended to place a stop loss above the highest price.
Find your own Donchian channel indicator strategy
Donchian channel can use to breakout trading systems, and also trend following.
The examples above are just a few ways to use the Donchian channel indicator.
You can explore more thoroughly according to your trading style.
But if you use one of the above methods, then the thing to note is discipline, record all your positions with reasons and the end of the transaction for profit and loss.
You can use Excel for trading journal records, as time goes by, you will find a style that suits your soul.
With a demo account, you will be free in trading without the burden of feeling, maybe some people think this is a waste of time.
But with a demo account, you can learn to apply the Donchian channel indicator.
Where you can change the value of “n”, even though by default it uses 20-day highs.
You can change it to the property according to your choice, maybe 10, 15 or something else.
The Donchian channel indicator is a trend following indicator that can be used in trading system breakouts.
To get this indicator on the MetaTrader 4 platform, you can download it on mql5.
If you are a beginner who still likes to beautify charts with additional indicators, this is an interesting choice.
Besides good and some traders have said that this has a high probability so you should try.
You can use the TenkoFX demo account as a training tool.
Thank you for reading, finally, if you like this article, please share it on your social media.