What are Donchian Channel?

It is important to use indicators and patterns when trading on the stock exchange. These indicators can be used to help you make accurate trading decisions while limiting your losses. There are many technical indicators, but none as powerful as Donchian channel indicator. This indicator gives you detailed information about market movements and trends, which allows you to place trades according. Here's what the Donchian channel looks like and how you can use it.

What are Donchian channels exactly?

Richard Donchian, a well-known derivatives trader, developed the Donchian channel technical indicator. To identify high, low and median stock prices or assets over a specified period of time, the indicator uses moving averages. The indicator then compiles this information and allows traders to use it for their trading decisions.

Donchian channels can be used by traders to determine support and resistance levels for an asset, identify breakout points and identify new trends. The Donchian indicator can be compared to the Bollinger bands.

How does the Donchian channel indicator appear?

Let's now get into the details of the Donchian indicator.

Below is a 1-month Nifty50 chart which clearly shows the Donchian channels over a 20-day period. You can customize the Donchian indicator to suit your time frame.

You can see that the blue portion is the Donchian channel indication. It is composed of three channels: the upper, lower, and median (or middle) channels. Here, the upper and lower channels will be highlighted in blue while the middle channel will be highlighted in orange.

The Donchian channels indicator's upper channel denotes that the asset is worth the most during the given time period. In this instance, it is 20 days. The Donchian indicator also shows the lowest price for the asset within the specified time frame. The median, or middle channel, is the average of the lower and upper channels.

How to use the Donchian indicator for trades?

Let's dive deeper into the concept. We can use the Donchian channels to find breakouts and breakdowns.

Scenario 1: Breakout

You can identify a breakout trend by watching the Donchian channel indicator's upper channel. A breakout occurs when the asset's price touches or exceeds the upper channel. This picture shows that when the price of an asset touches the upper channel, it initiates a new uptrend.

The point marked by traders is the "breakout point" and should be considered the entry point. To be safe, you can always watch the candles that appear after breakout point to make sure that the trend has solidified before entering a long position.

Scenario 2: Breakdown

All you have to do to identify a future breakdown trend is to keep an eye on which channel of the Donchian channels is lower. A breakdown occurs when the asset's price touches or exceeds the lower channel of the Donchian indicator. This is evident in the above image. The first and second candles are shown in the above picture. The lower channel is almost touched by the first candle, but the second touches it. The asset's price will begin to fall once it touches the lower channel.

The point marked by traders is the "Breakdown" point and should be considered the entry point. Remember to watch out for any candles appearing after the breakdown point. You can stay on the safe side by checking that the trend has stabilized before you enter a new short position.

Conclusion

The Donchian channel indicator, which gives information about the price movements of assets, is very easy to interpret and use. All charts and tools can be automated nowadays. You just need to visit your favorite charting software, select the asset and then choose the time period you need the Donchian indicator. The indicator's formulas will automatically plot the channels.