In the 1950’s, Richard Donchian created one of the most well-known trading systems based on 4-week price channel breakouts, and professional traders still use this simple and effective system for day trading in today’s markets.
This system is widely used by traders on an intra-day, daily, weekly and monthly basis with great results, and can be used with minutes, hours, days, weeks and even monthly charts.
· A breakout is described as the price exceeding the high of X-Number of minutes/hours/days/weeks/months.
· A breakdown is described as the price exceeding the low of X-Number of minutes/hours/days/weeks/months.
The specific “Donchian method” works best in trending markets and uses 20-period channels, however traders are able to make changes to the number of ‘periods’ to suit their needs and market conditions.
Trading Donchian Price Channels:
An intra-day trade in the ‘Donchian Method’ is entered long when price exceeds the high of a 4-hour range. A trade is entered short when price exceeds the lows of a 4-hour range.
Place your Profit-target:
The width of the Donchian Price Channel defines the resulting target move. The wider the channel’s range is, the bigger the move will be, and the wider our profit-targets will be.
Traders may also place two (2) profit-targets, using the 50% and 100% of the channel’s range as the target(s).
Always use a Stop-loss:
A "stop-loss" order is placed at the middle of the channel’s range, which is often called the ‘mid-line’ of the Donchian Price Channel.
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