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Donchian Channel Indicator

The MT4 Donchian channel indicator is basically a trend-following system that was designed by Richard Donchian in order to obtain the best entry points in the forex trend direction. Note that the channel width expands with volatile markets and vice versa. Consequently, chartists may use the Donchian channel indicator for MT5 to estimate the market volatility. Also, this MetaTrader indicator is best for breakout trading systems that aim to follow the actual direction. So, it provides entry signals near channels during pullbacks in order to get retracement opportunities. In short, the Donchian channel indicator is a volatility indicator that helps Forex traders to determine price movements as well as entry and exit signals on Tradingview charts in diverse markets and various timeframes. Our analysis will consider Donchian channels for multiple trading styles in a detailed technique.

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Donchian Channel Indicator

Donchian channel strategy

The Donchian channel strategy is quite simple. In fact, it consists of three channels like banded tools. To explain, two externals, upper and lower ones, are located around a median band. Therefore, the upper line designates the highest price of a security in a chosen period n. While the lower line designates its lowest price in the same period. Also, the middle band is the average of the two externals. Thus, the zone between the upper and lower lines is the Donchian channel. You can use this tool at any timeframe, like intraday or weekly charts. You can apply it also in stocks, forex, crypto, or CFD markets. It is used mainly to measure the volatility in the market and to assess if the market is overbought or oversold.

Donchain channel VS Bollinger band 

Donchian channel and Bollinger band look similar. But they are very different from each other in many aspects.

Firstly, They don’t draw in the same manner in the chart. Channels mark the highest and lowest price over n periods. While the other indicator draws a simple moving average (SMA), the SMA adds or subtracts the standard deviation of the price for n periods, multiplied by 2.

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Secondly, they don’t have the same calculation. BB formula is the difference between 2 standard deviations of the simple moving average in a specified period. Instead, DC takes the highest high and the lowest low in a selected period for measuring the three bands.

Thirdly, they differ in the interpretation of trading. With the second indicator, if the market breaks above the upper line, it implies that the market is in an overbought and can reverse its direction. On the other hand, if this happens with the Donchian channel it means that the buyers made a move, and the movement will continue in the same direction.

How do Donchian channels work ?

Donchian channel is based on ups and downs set by the indicator on your trading chart. So it draws on the candlestick charts instead of the line charts because candlesticks take into account, the high, low, open, and close. It is plotted around the price movement and helps Forex traders to identify the potential breakout, retracements, understand the volatility of the underlying asset, and expect the bullishness and bearishness in a precise timeframe. The external channels of the Donchian tool can form effective support and resistance levels, especially when used with other technical indicators.

Donchian Channel Indicator

Donchian calculation

This depends on the number of periods that traders will use according to their technique. which ranges from minute, hour, day, week, etc. Forex traders generally use 20-days as a default period set by  Richard Donchian. which means that the indicator will draw the 20-period high and the 20-period low price as a line.

  • Upper channel: represents the highest high for the selected period.
  • Lower channel: represents the lowest low for the selected period.
  • Middle channel: represents the average of the upper and lower ones: MC = [UC + LC] / 2

To calculate Donchian channels follow these steps:

High/Low Channels:

  1. Select the timeframe (minutes, hours, days, weeks, months).
  2. Compare the high (low) print for each minute, hour, day, week, or month over the chosen time period.
  3. Select the highest (lowest) print.
  4. Draw the result.

Middle Channel:

  1. Select the timeframe (minutes, hours, days, weeks, months).
  2. Compare high and low points for each minute, hour, day, etc over the chosen time period.
  3. Add the highest high print with the lowest low print and divide by two.
  4. Mark the result.

Channels interpretation

When the MT4 Donchian channel indicator is wide, this means that there is high volatility in the market and heavy price fluctuation. Conversely, it is narrow when prices are stable and the market is calm.

  • Interpreting the upper channel:

If the market is wafting around the upper channel and trading between it and the middle one. This means that the buyers are conquering the market. And this can persist in the next trading session. In this case, Forex traders search for buying opportunities.

  • Interpreting the middle channel:

As You know that the middle channel is the average between the outer two lines. Therefore, if the price is more or less at this center. This means that the volatility in the underlying asset is frail.

  • Interpreting the lower channel:

When the market trades near the lower channel side for a long period. this means that traders are attempting to keep control of the market. In this case, traders typically prepare to go short.

  1. Donchian channel Tradingview indicator can assist to identify overbought and oversold. Therefore if the price reaches the upper channel, it is a signal of overbought. while if it reaches the lower one, it is a signal of oversold.
  2. It can show also the strength of the movement. If the price shifts into the overbought zone and breaches the upper channel during a bullish trend. This is a signal that it is a strengthening direction.  And if the price shifts into the oversold zone and breaches the lower channel during a bearish tendency. It means that there is negative market sentiment.

How to trade Donchian channel ?

There are some techniques that the Donchian channel MT5 indicator offers to spot breakouts and pullbacks.

Breakout Technique

This technique aid Forex traders to choose between taking a short or long position. To do this you have to watch the price behavior around the indicator’s external lines.

According to the Donchian channel breakout technique, traders can take a long position when the stock is trading higher than the Donchian channels. In more detail, this happens when the market is in an upward direction and the price breaks the recent high and crosses above the middle band. On the other hand, traders can take a short trade when the stock is trading lower than the Donchian channels. which means that the market is in a downward direction and the price breaks the recent low and reverses below the center channel.

breakout strategy

Pullback technique

According to this technique, you need to wait until there is a pullback of the market price to the middle channel. Then you can open a long or short position according to your system. By identifying potential upcoming retracements, Forex traders can catch possible opportunities with high profits. Consequently, wait for the pullback opportunity and initiate your trade.

So this technique aims to catch retracement opportunities from the external channels. To trade it, you need constantly watch the internal line. You can open a short order when the price is hitting but not breaching the upper line. Because it will probably revert to the middle line. Contrarily, you can open a long trade when the price bounces from the lower line because it will adopt a bullish trend towards the middle channel. And you can keep your position until the price reaches the contracting line.

Plullback strategy

It is recommended to combine the Donchian channel MT5 indicator with an oscillator to get more precise signals. such as the popular RSI oscillator.

Advantages and disadvantages of the indicator

Donchian channel MT4 indicator is like the other technical indicator possesses good things that are very helpful and also bad things that you should be careful from them.

Advantages

  • Easy to use, professionals or even beginner can understand easily.
  • Fitting with any timeframe.
  • Works with any kind of asset.
  • Very helpful to identify market volatilities.

Disadvantages

  • Can give false signals.
  • should combine it with other technical indicators to increase its accuracy and dependability.
  • Requires a continued presence in the market.
  • Based on historical data, which mean that may not reflect current market situations.

Donchian channel indicator MT4

The Donchian indicator for MT4 is a very helpful channel as it shows the volatility in the market during a specified n period. It is drawn over the main price  MetaTrader 4  chart. Thus, This Donchian channel MT4 indicator helps traders to identify overbought and oversold in the market. As you can see in the chart below when the volatility is high the upper and the lower channels are wide, while when the market is not volatile they become narrow.

Donchian Channel Indiactor MT4
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Donchian channel indicator MT5

Donchian channel for MT5 is a simple indicator used by technical analysts to evaluate the volatility of the market. It allows traders to identify breakouts or pullbacks in the market. The Donchian channel indicator is not available by default in the MT5 platform. So you need to install it by yourself. In fact, it is so easy to install this  MetaTrader 5  indicator.

Donchian Channel Indiactor MT5
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Donchian channel indicator Tradingview

Donchian channel indicator is available on the Tradingview platform and is used by many traders as it is easy to use. And it can apply at any timeframe. This Donchian indicator for Tradingview allows making trading decisions about when taking short or long trades based on a channel.

The chart below is a shot from the  Tradingview  platform of the Donchian channel indicator, showing you the two kinds of trades.

Donchian Channel indiactor Tradingview

Conclusion

Traders always suffer from market volatility. So Donchian channel MT4 indicator is the solution as it plots market volatility. If you are a beginner don’t hesitate to use it as it is easy to employ and interpret at the same time. But, you should be very prudent when trading with this MT5 indicator because can give false signals, but don’t worry about that, you can simply combine it with another indicator and everything will be ok.

Key takeaways

  • Donchian channel Tradingview indicator is very simple and can be used by professionals and beginners.
  • It looks like the banded tools. But, they differ in many aspects.
  • It exposes three channels, an upper one that designates the highest price, a lower one that shows the lowest price, and a middle one that represents the average of the outer channel’s average.
  • DC MT5 indicator displays some techniques that help traders trade. Such as breakout and pullback techniques.