The Donchian Channel indicator was invented in the 1970s by a professional trader Richard Donchian. His indicator has proved its worth on the currency exchange markets and financial derivatives as well. It has become quite popular, though it is rather used as a custom indicator.
When trading financial derivatives, you have to make assumptions about the price movements. Your success depends on the ability to identify the trend and its reversal. There are plenty of indicators that will help you do it. The Donchian Channel is loved since it visually outlines the top and bottom limits of the trend.
The Donchian Channel indicator is ahead of the Bollinger Bands. But it is underestimated by many traders. It is used mostly by professionals. Luckily for you, Olymp Trade has it in its offer. Let’s check how it works.
Setting up the indicator at Olymp Trade
After logging in and choosing the asset and the chart type, you need to click the indicators feature. Then, select the Donchian Channel and it will be attached to your chart.
You can adjust the period, thickness, and colors of the lines by clicking a pen icon next to the indicator’s name.
What is the Donchian Channel?
To calculate the top and bottom borders you need to have a customized periods’ number. The upper boundary is the highest price observed in the last n period. The lower boundary is the lowest price within the last n period.
The default n period is equal to 20. As mentioned before, you can change this value if needed.
The Donchian Channel reminds of the Bollinger Bands indicator. The difference is that here the candles remain within the upper and lower border of the indicator. Furthermore, the Donchian Channel is made up of average indicators for a maximum and minimum price.
Pros and Cons👍👎
- The Donchian Channel can visually identify the top and bottom limits of the trend.
- It assists in determining the direction and potential reversals of the trend.
- The indicator is customizable, allowing users to adjust to their specific needs.
- Some traders may find the Donchian Channel less intuitive than other indicators.
- Its effectiveness may vary in different market conditions. Particularly, it may generate false signals in highly volatile markets.
- While useful, it shouldn’t be the sole indicator used for decision-making. Complementary tools and analysis are essential.
Donchian Channel Indicator Properties
|Top and Bottom Borders||These are calculated based on the highest and lowest prices observed in the last n period.|
|Middle Line||This serves as a signal line, indicating when to open up or short trades depending on the position of the candle relative to this line.|
|Customization||The period, thickness, and colors of the lines can be adjusted based on trader preferences.|
Using the Donchian Channel indicator in trading financial derivatives
The price fluctuates between the upper and lower band. Search for the points where the candle crosses the middle line.
You should open an up position when the bullish candle crosses above the middle line.
Open a short trade when the bearish candle crosses below the middle line.
You can define a trend by looking at the channel and the candles. There is an uptrend when the channel is moving up and the candles are developing above the middle line. A downtrend is when the channel is moving down and the candles remain in the lower half of the channel.
You can use the points where the price bounces from the middle line of the indicator as signals to enter the trade. When the price rebounces from the middle line during the downtrend and continues down, buy a PUT order. When the price bounces from the central line during the uptrend and continues up, buy a CALL contract.
The Donchian Channel is a good indicator when identifying the trend and the price breakouts. It defines the highest high and the lowest low in a certain time period. I recommend trying it on the Olymp Trade demo account. Write in the comments section below if you have any experience in trading with this particular indicator. You can also ask any question you have about it.
- Q: What is the main purpose of the Donchian Channel indicator?
A: The primary purpose is to identify the trend and its potential reversals by outlining the top and bottom limits of the trend.
- Q: How do I use the Donchian Channel indicator for my trades?
A: Watch for points where the candle crosses the middle line. An upward cross is a potential signal to open an up position, and a downward cross is a possible sign to open a short trade.
- Q: Can I customize the Donchian Channel indicator?
A: Yes, you can adjust the period, thickness, and colors of the lines to suit your preferences.
- Q: Does the Donchian Channel guarantee success in trading?
A: No, no indicator can guarantee success. It’s essential to perform your own research and consider other market factors.
- Q: Does the Donchian Channel work in all market conditions?
A: The effectiveness of the Donchian Channel can vary in different market conditions. Particularly, it might generate false signals in highly volatile markets.
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