Day trading with Donchian channel strategy

So you have a trading strategy that has been going great.

You’ve done well with it and made some excellent money–until one day, a few days after a market crash, when suddenly your strategy seems to stop working.

Your analysis indicated that the markets should recover quickly from this downturn. Your model showed the indicators reversing direction soon after the drop occurred, but those signs never came! Things kept getting worse as time passed. Now, what do you do?

Day trade with Donchian channel strategy

There are many reasons why a trader’s strategy may not be working as expected. It could be market sentiments changing towards certain assets or some unseen manipulation. It is also possible that the indicators you are using are no longer valid.

It is essential to always be prepared for such a situation by having a backup plan. One possible backup plan is to day trade with the Donchian channel strategy.

The Donchian channel was developed by Richard Donchian, the father of modern technical analysis. The basic idea behind the Donchian channel is that price moves in trends and that you can identify these trends by looking at price volatility.

 Donchian channel indicator

The Donchian channel indicator measures the highest and lowest prices over a given period and then plots these values as two lines on a chart. The advantage of this over using a simple moving average of price is that it allows for more volatility in the market.

When creating trades with this strategy, you will only take advantage of opening short positions when the price action falls below the lower envelope line. It means the trend is going down, and at that point, you could be looking to open a short position or a sell limit order. You would take advantage of long positions when the price rises above the upper Donchian channel line. In this way, you are only taking advantage of trending movement in the market, which significantly increases your odds of coming out from your trades.

Short selling

Short selling with this strategy is slightly more complicated than opening up long positions, but it’s nothing too difficult to wrap your head around with some practice. When using reversion strategies like this one, you typically want to set a stop loss for yourself that can’t be breached by any sudden market movement – essentially protecting yourself from a domino effect on your other trades.

There are two types of Donchian channels:

The two types are the 20 periods and 40 periods. Their difference lies in how many candles you will be looking back to check for volatility. With the 20 periods, you will have 20 candles from which to get your data, while with the 40 periods, it will be 40 candles etc.

You can use a combination of these two charts on your trading platform’s interface or build an indicator yourself with TradingView’s ZingChart. Once you have created your chart, include volume to see the transparency behind any decisions made by buyers and sellers.

Bottom line

It’s important to remember that the Donchian channel indicator is not a stand-alone tool. Use it alongside other technical analysis indicators to get a more holistic view of what’s happening in the market. Risk management is always critical when trading any financial instrument, so make sure you know your risk tolerance before diving into day trading with this strategy. With some practice and fine-tuning, the Donchian channel strategy can help you achieve better trading results – even in today’s ever-changing markets.