Donchian Channel and trading system based on it
The principle of the calculation of the channel, proposed back in the 70's, the author of the methodology by Richard Donchian, is to determine the maximum and minimum values of the price for a certain period. In this case, the calculation takes into account only the highest value and the lowest value of price, and on their basis construct two lines forming the price range.
To calculate the value of of the price range is important, only one parameter - the period during which the extremums are determined. The higher the value, the greater the range of bars of history will be used for their search. The author of a trading strategy recommended the use period = 20.
Since the Donchian Channel created for long-term trading, the value of 20 is chosen not by chance - it averaged the number of working days in a month. Establishment period of 20 candles, allows maximally consider the impact that it has on the market cyclical changes. But the cycle of 20 candles is equally effective when trading on the hourly time frame or even a quick scalping on the M5. To date, Donchian Channel finds its application in many trend trading systems, and the value of the period for the construction of the channel is taken in the range from 18 to 24 in the more complex options strategies, which simultaneously uses multiple Donchian Channels - for separate receive signals to the entry and exit value of the period can be 50 or more bars.
Trading system based on the Donchian Channel indicator suggests that if the price breaks through the channel, and in other words, will be higher than the maximum or less than the minimum price values defined in the last 20 bars, the signal on the entry into the market is considered to be formed. At the same time, exit prices abroad channel means not only the installation of orders in the direction of penetration, but also the closing of all the others, which are directed in the opposite direction.
Rules of the trading system based on Donchian Channel:
- Necessary open Long position and closed all short positions in the formation of the bar is higher than the upper line of Donchian Channel (blue).
- Necessary open Short position and close all long positions in the formation of the bar below the bottom line of Donchian Channel (red).
Entry into the market is carried out on the closing prices of the last candle that broke the price range. But focusing only on these conditions, we obtain a large number of false breakout of the channel, and the profitability of the trading system will be negative.
As can be seen on the image, a trading system based on Donchian Channel is not devoid of the main disadvantage of channel strategies based on the breakdown, so it is important to follow the money management and to limit the risks to not more than 1 and 1.5% of the deposit. The risk management system is extremely important, and you should not ignore it, especially since, with sufficient volatility and a strong trend movement one good trade can compensate for a whole string of false signals.
In addition, the signal to exit (close positions) may be submitted too late, which greatly reduces the opportunities for profit, or requires constant supervision by the trader for the process of price changes in the channel. And if within the strategy based on Donchian Channel is not possible to prevent the generation of false signals (but only within of this strategy!!! Adding moving averages or oscillators - depending on the state of the market is able to minimize their number), the receive signals to close positions it is quite possible before the opposite direction of absorb all earned profit. It suffices to add the second channel with a smaller period that is more sensitive to changes in price due to the fact that a maximum in the higher channel will not affect the formation of the price range.
But besides displaying of the maximums of volatility, Donchian Channel has another interesting property. The fact is that the front of a strong price movement canal narrows. This behavior of the indicator is consistent with the theory of cyclical changes in prices, because the volatility as a phenomenon is a direct consequence of such a change.
For a trader change the channel width may act also a sign of the coming of a large trend. And if the periods of rising prices alternated with periods of their fall, so too quiet market will move in the lateral movement in a state of active growth or decline, and Donchian Channel will prompt the time of its beginning.
Despite all the shortcomings, a trading system based on algorithms Donchian can be profitable provided to solve the problem of a large number of false signals. It is sufficient to combine the construction of the channel on the basis of volatility and an oscillator that will help determine the strength of the pulse of the current trend. Add to the trading system indicator MACD.
Using the oscillator allows you to "filter out" the most false signals to the input, and when trading on the hourly time frame per day will open 2-3 trades, instead of 5-8, which reduces the requirements for the deposit, and also reduces the intensity of the trading process.
But even with such an embodiment, the use of the strategy Donchian`s is a significant lack. Since the channel and MACD well show themselves only in the presence of sufficient amplitude of price movements in the absence of of volatility MACD readings will be close to zero, and the width of the channel will not be sufficient for the timely detection of the beginning of a trend.
Simplicity of calculations used for the construction of the channel led to the creation of a large number of automated trading systems based on the algorithm of determining the price range Donchian. You can try out the (on the demo, of course) proposed indicator and advisor-scalper, who works for the timeframe M5.
Watch for adjusting the parameters responsible for the risk - lot size and distance orders, limiting losses. In the selection of the appropriate parameters, you can get up to 70% profitable trades.
In the archives Donchian_Channel.rar:
- the donchian scalper 1.0 12 pairs m5.set
- Donchian Channel.ex4
- donchian channels.tpl
Free Download Donchian Channel and EA on the basis of Donchian channels