Tuesday, April 1, 2014

Trading With Donchian Channels; SchoolOfTrade.com

Richard Donchian
In today's video we take a look at the widely popular Donchian Channel indicator and how we can use them as traders to bring in profits and initiate trades.

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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