The Donchian Indicator Trick for Easy Profits

Richard Donchian was a futures trader, credited with creating the popular Donchian channel indicator. Richard Donchian is known as the grandfather of trend following.

The Donchian channel is formed by using the highest high of x number of days and the lowest low of the same x time period, and then marking the point between those values ​​on your chart.

The Donchian channel is a handy indicator to watch the volatility of a stock. When a price is stable, the Donchian channel will be reasonably narrow. When the price fluctuates greatly, the Donchian channel will be much wider. Its main use, however, is to give signals for long and short positions. If a security trades above its n-day high, then a long trade is placed. When it trades below its lowest x-day low, a short position is established. They are invaluable for predicting support and resistance price levels from an objective point of view.

how to use

Donchian bands are normally used as a breakout indicator, it defines support and resistance levels and generates entries as price breaks these levels. Since the lows and highs generally correlate with support and resistance levels, this indicator is useful for objectively defining these areas.

Having said that, it is also used as a reversal signal: you enter when the price touches a band and reverse its direction. Before using the indicator in this way, confirm the validity of the psychological level by requiring a minimum of 2 touches on the level. This ensures that the signal is strong and increases its reliability.

Another way to trade the Donchian Band is to use your middle band. The middle band is the average of the upper and lower band and can also be used to quantify the trend. Entry signals are generated as follows: when the price crosses the middle band from below, you buy, and when the price crosses from above, you sell. It’s really a powerful signal when you check the strength of the trend with other indicators like the MACD and Stochastic.

Invest using Donchian bands

There are numerous methods to decipher and exchange the Donchian Bands. Probably the most used is definitely the breakdown:

1. Long Trades – Long trades are entered when the price breaks above the upper 20-period Donchian band. Conservative traders wait for the price to close above the upper Donchian band to enter the trade.

2. Short Trades – Short trades are entered when the price falls below the lower 20-period Donchian Band. Risk averse traders wait for the price to close below the lower Donchian band to enter the position.

Another approach to using the Donchian bands is to use the middle band as a buy or sell signal line. Entry signals occur as follows: when the price crosses the middle band from below, you buy, and when the price crosses from above, you sell.

Donchian’s 20 Stock Trading Tutorials

Richard Donchian began his livelihood on Wall Street in 1930. Donchian began writing a technical market letter in 1933 and continued for years. In 1934, Donchian created the following 20 trading guidelines that are based on human psychology. Human psychology never changes, so these rules continue to be appropriate today.

1. Beware of acting immediately on popular public opinion. Even if it’s correct, it will usually slow down the move.

2. From a duration of boredom and inactivity, watch for and be prepared to follow a movement in the direction of increasing volume.

3. Limit losses and increase profits, regardless of all other rules.

4. Light commitments are recommended when the market position is not secure. Clearly defined movements are signaled often enough and the focus on these movements minimizes unprofitable saw strokes.

5. It rarely takes a position in the direction of an immediately preceding three-day move. Expect a one day reversal.

6. Judicious use of stop orders is a valuable aid to profitable trading. Stops are useful to protect profits, to limit losses and for certain formations like the triangle approach to take positions. Stop orders tend to be more valuable and less treacherous if they are used in proper relation to the chart formation.

7. In a market where highs are likely to match or exceed downs, a stronger position should be taken for highs for percentage reasons: a drop from 50 to 25 will generate only a 50% profit, while a advance from 25 to 50 will be compensated at 100%

8. When choosing a position, price orders are allowed. When closing a position, use market orders.

9. Buy strong bottom and strong action products and sell weak ones, subject to all other rules.

10. Moves where the rails lead or participate heavily are often more worth following than moves where the rails lag.

11. An analysis of a company’s capitalization, the degree of activity of a problem, and whether a problem is a slow racehorse or a spirited racehorse is just as critical as a study of statistical reports.

12. A move followed by a lateral range often precedes another move of nearly the same length in the same direction as the original move. Usually, when the second move from the sideways range has run its course, you can expect a counter move closer to the sideways range.

13. A reversal or resistance to a move is likely to be encountered:

A. By reaching levels where before now, the commodity has fluctuated for a considerable period of time within a narrow range

B. When approaching highs or lows

14. Watch for big buying or selling opportunities when they approach trend lines, especially on medium or low volume. Make sure said line hasn’t been hugged or bumped too much.

15. Watch out for crawling moves or repeated hits of major or minor trend lines and be prepared to see if these trend lines are broken.

16. The break of the minor trend lines against the main trend gives critical signals to take positions. Positions can be taken or invested in such places.

17. Ether slope triangles can signify accumulation or distribution depending on other factors, although the triangles frequently break on the flat side.

18. Be careful with the climax of volume, particularly after a long move.

19. Don’t trust gaps to close unless you can distinguish between break gaps, normal gaps, and depletion gaps.

20. During a move, take or increase positions in the direction of the market move the morning after any one-day reversal, however slight the reversal, particularly if volume declines on the reversal.