Monday, January 20th, 2014 by Tim Lanoue
The Donchian Channel indicator was created by Richard Donchian with the purpose of serving as a moving average indicator that plots the highest highs and the lowest lows over a given time period. The main principle of this indicator is to act as a guide for predicting possible breakouts that may occur during the assets trend. Moving forward we will cover the implementation of this indicator into a strategy.
Setting up the Donchian Indicator
In order for a proper setup to be established we first must make sure that our target asset is a reliable asset with relatively low volatility. Meaning that the price of the asset does not fluctuate much over a certain period of time; we want more of a calm asset. Examples of these types of assets would be the EUR/USD, Apple, Gold, Silver, Oil, USD/CAD or USD/CHF. The next step is to make sure our timeframe is set on a timeframe between 15 minutes and 1 hour. If your time frame is not within the time frame given above then the use of the strategy could result in false signals and losing trades. The last condition that must be met is that our asset must be displaying a bearish trend since most breakouts occur during a downward trend.
The Donchian Channel Indicator Strategy
Once the right setup is established then we can look forward to the strategic part of applying this indicator. As you can see in the picture below we have the Eur/Usd asset set up on the 15-minute timeframe and it is displaying an overall strong bearish trend. The first thing that we need to look for here is a break in our bottom Donchain Channel line, this is our first hint that we could have a possible trading entry in development. The second indicator that we look for is our signal candle, our signal candle must all be a bearish candle as seen in the four examples below. The last signal we look for is a confirmation bearish candle as seen below within the light blue boxes. Once all three criteria have been met then we can place a put trade for an expiry time consisting of 5 to 15 minutes.
Richard Donchian is the creator of the Donchian Channel indicator that serves the main purpose of pointing out potential breakouts during the downward trend of an asset. Once the right setup is established and the three conditions of the strategy portion have been met then a trade can be placed. This indicator and strategy is relatively easy to implement and can be useful to traders who like to be dynamic and use a variety of trading strategies. For more information on technical analysis charts, price action and various indicators, visit the binary options indicators page located at the top menu!