Donchian channel is a trend following indicator which is based on high and low of the past market data. Donchian channels can be used to identify the trend, breakout, and volatility of the market.
In this trading system, donchain channels are used along with the exponential moving average which is another trend following indicator.
Traders should always trade when volatility is good and markets are either an uptrend or downtrend. By following this trading system, traders can catch major moves in the trendy markets. Let’s try to understand the working of this trading system.
Donchian Channel with EMA Overview
Donchian channel plots the upper band by plotting the highest high and lower band by plotting the lowest low of the last 20 periods.
This indicator is very helpful in calculating the volatility of the market. If channels are narrow then volatility is low and if channels are wide it means there is high volatility in the market. Traders should avoid trading in low volatility conditions.
If the price gives a breakout from the upper band then it means the current price is more than the highest price of the last 20 period. this is a bullish indication and traders should look for buy trades after the breakout of the upper band.
If the price gives a breakdown from the lower band then it means the current price is less than the lowest price of the last 20 period. this is a bearish indication and traders should look for sell trades after this breakdown.
Donchian Channel with EMA Explanation
Moving averages are a very common technical indicator that is used for smoothing the price data and it gives a correct idea about the trend. If the price is above the Ema and the slope of EMa is up then bulls are in control and if the price is below the EMA and the slope of ema is down then bears are in control.
Also Read: Heiken Ashi Multi Ribbon
Donchian Channel: Buy Conditions
- Higher high and higher low structure formation in price action.
- Price should trade above the 20 EMA.
- The slope of 20 EMA should be up.
- Price gives Breakout from the upper band.
- Traders can hold the trade till the time price stays above EMA.
Donchian Channel: Sell conditions
- Lower high and Lower low structure formation in price action.
- Price should trade below the 20 EMA.
- The slope of 20 EMA should be up.
- Price should give Breakdown from the lower band.
- Traders can hold the trade till the time price stays below the 20 EMA.
