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Article Reviewed on October 31, Charles Potters Updated October 31, The Donchian Channel, created by Richard Donchian, plots a line at the high and low price of an asset over a set period of time, typically using candlesticks as a timepiece.
Candlesticks are plot areas on charts that demonstrate the open, high, low, close price and timeframe of a given stock and are shaped like candlesticks.
There is also the option to add a third line between the upper and lower lines.
Donchian Channel: Everything you need to know
This mid-band is an average of the upper and lower channel lines. Calculating Donchian Channels The indicator does not include the current price bar in the calculation.
In other words, if you choose to apply the indicator over 20 candlesticks, the bands are calculated and plotted channel strategy indicator on the 20 prior candlesticks. You can also design your own strategies by testing out the indicator in a demo account first.
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Traditionally, Donchian Channels are used to identify breakout positions breakouts are the point in which prices move through a previous high or low. The channels are generally most significant when identifying price movements between peaks and troughs in a stock's channel strategy indicator.
What is channel trading?
The channels are often used as a way to enter potentially emerging trends. In another strategy, you might consider exiting if the price reaches the mid-band or the opposite side of the Donchian Channel after entry.
Variations of the Basic Strategy Not all moves above the upper band or drops below the lower band warrant a trade. Add a trade filter, such as a moving averageto aid in highlighting the trend. Only take long trades if the price is above the moving average, and only take short trades if the price is below the moving average.
The Donchian channel measures the high and the low of a previously defined range — typically of the past 20 days.
During a steady uptrend, the price may pull back to the lower band. This is also a potential area to buy since the overall trend is up.
The Donchian system uses adjustable bands that are set equal to the n-period's highest highs and lowest lows across a moving average.
As long as the trend is down, short trades can be taken near the upper band. The mid-band can also be used for such trade signals.
You honor your trailing stop loss and get out when the signal tells you to. Can you do it? A higher value will ride a long-term trend and a lower value will ride the short-term trend. Ideally, you want it to be as low or even lower than the previous multi-year low.
Use a longer-period Donchian Channel for entries, such as the period, then use a smaller period, such as a 15, for exits. This might require having two Donchian Channels displayed at the same time.
Having two channel strategy indicator on the screen may make it hard to read and appear cluttered, so apply different colors to the different channels to distinguish them from each other. You should buy when the price rises above the upper band of the longer period channel periodand exit when the price falls below the lower band of the shorter period channel period.
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Short sell when the price falls above the lower band of the longer period channel, and exit when the price rises above the upper band of the shorter period channel. The channels may help in isolating times when potential trends are starting or ending.
Sometimes the market moves sideways—on those days the trending signals produced by the indicator won't be profitable. Establish a strategy, test it out over many trades and days in a demo channel strategy indicator only start using real capital if the strategy produces consistent profits during that partner options.