Each technical indicator has different functions and may assist in achieving various goals. However, they may work differently depending on your trading approach. In this article, we will cover 3 main ways of trading Donchian channels — an effective and versatile technical analysis tool available on IQ Option.
What is Donchian Channels Indicator?
Donchian Channels is a volatility indicator that can be used both on its own and as a part of a more complex trading system. This indicator may help determine optimal entry and exit points, as well as provide insights into periods of high and low volatility.
Donchian Channels indicator consists of three lines.
1. The upper one outlines the highest price observed over a set period of time and stays at the same level until a new high is met.
2. The lower line works similarly. It reaches the minimum value as the price goes lower and stays at the same level until a new minimum is met.
3. The middle line, as the name suggests, is located in-between the two. In order to make the indicators actually look like a channel, the area between the upper and lower lines is shaded.
What Are the Main Ways of Trading Donchian Channels?
There are different methods of trading with Donchian Channels. Let’s take a look at the most popular options.
1. Upper and lower lines used as support/resistance levels
In this case, traders might expect the asset price to rebound from the lower line and start moving upward to indicate a potential change from a bearish to a bullish trend. Conversely, it may bounce off the upper line and move downward to indicate a potential shift to a bearish trend.
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Note that during a strong trend, no matter whether positive and negative, candles may close at higher/lower levels, thus pushing the line in the direction of the prevailing trend.
2. Trading Donchian Channels + MACD Indicator Combo
Here, Donchian Channels may be applied in the same way as described in the previous part. By adding the MACD indicator, traders may expect to receive more accurate information about price changes to confirm their readings. However, it should be noted that such indication may not be always 100% correct.
MACD consists of two lines: a slower moving average (orange) and a faster moving average (blue). When the fast MACD line crosses the slow MACD line from above, an upward trend may be coming up. When the opposite is true, a downward trend may be expected. In other words, MACD might be used as a confirmation for Donchian channels to indicate possible entries.
3. Trading Donchian Channels + Volume Oscillator
The Volume Oscillator consists of just one line that provides information about the asset’s trade volume. It tracks the dominant trend through volume fluctuations. For example, when the Volume Oscillator line is above zero, this may point to a potential increase in trading volume. On the contrary, when the indicator line is below zero, there may be an upcoming decline in trade volume.
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When the asset price is below the Donchian Channels middle line and the trading volume is growing, downward movement may be expected to continue.
Note that none of the above-mentioned approaches is capable of providing accurate indications 100% of the time. It is, therefore, advised to develop a trading system of your own and test different methods on a demo account before trading with real funds.
In Conclusion
These were just 3 basic ways of trading Donchian Channels indicator that traders may consider including in their trading routine. Using technical indicators in combination may be a good addition to your trading approach that might help confirm readings and find potential trading opportunities.
