The Donchian channel is by far one of the most widely used indicators used in technical trading systems today, and having said this, is one of the most effective you will come to find in your arsenal of tools – especially if you find yourself working on larger, well-trending markets.
Donchian Channels Explained
This market indicator was created by Richard Donchian and uses the highest and lowest positions that a market has reached during previous days, revealing a market trend that essentially assists traders in deciding when to enter or exit the market. Here, the peak is the highest high over a set period of time and the bottom is the lowest low over the exact same period of time.
Mastering the Donchian Channel
When the market price moves outside the Dochian channel it is known as a breakout. Donchian channels tend to work more effectively when using large time frames. In other words, the larger the time frame the more likely it is that the result will be a significant breakout. When prices breach the upper channel it would be recommendable for traders to look at going long (selling), and similarly establish short (selling), positions when the trend is towards the lower channel.
Achieving success and making incredible profit by using Donchian is dependent on various factors including the type of markets on which they are being used and with which other trading systems they are being used. It is important that you base your decision on the results of a number of indicators and not only one.
Donchian channels are more effective on currency pairs than with stock market indices. The reason being that with stocks it is generally common practice to buy low and sell high. On the other hand, with currencies it is wiser to buy high and sell higher or to sell low and then buy back lower.
In conclusion, by mastering the Dochian Channel, traders enable themselves to spot the entry and exit signals being indicated with ease. Being similar to Bollinger Bands, this tool is also a volatility indicator. Although more effective if used in currency pair trading, this indicator can also be used in stock as well as commodities trading markets.