Donchian Channel Strategy Explained What You Didn't Know About This Strategy

The Donchian Channel Strategy is a popular technique that traders use in their approach to financial markets. However, using the strategy involves a deeper understanding of the charts and it can be a difficult concept for novices to grasp.

To help you get to grips with the strategy and put it to use on the CAPEX platform, we’ve put together the following review.

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One of the reasons why the Donchian strategy is so popular is that it can be applied to numerous different markets. At CAPEX, we offer trading in over 2,100 different instruments – which makes our platform perfect for implementing the Donchian Channel strategy. Furthermore, you get to try them without risk with our demo account.

Whether you are looking to trade forex, cryptocurrency, stocks or indices, the Donchian Strategy can be applied to any charts and, when used correctly, can form the foundation of a highly effective approach to trading.

The latest software

CAPEX offers two award-winning trading platforms that boast some of the most comprehensive and customisable charting options that you’ll find anywhere on the market. The Donchian Channel strategy is based around technical analysis and looking at price movement set between bands. This means that charts play a crucial role in implementing the strategy.

The trading platforms offered by us at CAPEX are perfect for this, as they offer several different price chart types, with adjustable time frames. This makes them perfectly suited not only to the Donchian Channel strategy, but for any charts-based approach to trading, such as the Bollinger Band strategy or Fibonacci trading strategy.

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An overview of the Donchain Channel strategy

So what exactly is the Donchian Channel strategy? Well, the channel itself is effectively another indicator that traders can use to track the price movement of a given asset. The strategy involves using said channel to inform your entry points into the market and whether or not you issue buy or sell orders.

The Donchian Channel gets its name from its inventor, Richard Donchian, who has been dubbed the “Godfather of Trend Trading”. Donchian himself was a futures trader in the mid 20th century and sought a way of trying to make sense of volatility. The original premise was intended for use on daily values, but today it is adapted and applied to just about any timeframe.

What does it mean for traders?

In essence, it is very similar to many other chart bands and involves three lines – the upper, the lower and the median. The upper line shows the highest price an asset or security has reached in the selected time frame, whilst the lower line indicates the lowest price. The line in the middle is used to indicate the average between the two.

With CAPEX, you get to learn and practice different strategies without risk, using the demo account provided with all accounts.

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Pros and cons of the Donchian Channel strategy

At first glance, the Donchian channel strategy bears striking resemblance to the Bollinger Band strategy, but it has many of its own advantages and, in actual fact, the two strategies can be used to complement one another.

Pros of the Donchian Channel strategy:

  • A useful way to visualise market volatility
  • Can be applied to numerous markets
  • Highly adaptable
  • Can be used in conjunction with other strategies

Cons of the Donchian Channel strategy:

  • Susceptible to false breakout signals

Ultimately, the pros and cons of the Donchian Channel strategy will vary depending on your individual approach to trading. The Donchian channel strategy is relatively easy to get to grips with. However, on the other hand, it is often better used with other strategies, which is where things get a little more complex. If you want to keep improving your skills as a trader, don’t skip the CAPEX Academy, where you’ll become a better trader in no time.

Competitive spreads at CAPEX

We at CAPEX offer trading with highly competitive spreads. Whereas many band-based trading strategies, such as the Bollinger Band, are based around standard price deviation, Donchian Channel bands are set according to the high and low prices of a particular asset. This means that spread is an important consideration, as firms with inordinately high spreads can distort the effectiveness of the strategy.

A step-by-step guide to using the Donchian Channel strategy

As we’ve noted, the Donchian Channel lines are a way of visualising market volatility and the associated strategy involves using certain markers to inform your trades. To start using the Donchian Channel strategy on the financial markets, you’ll need to take the following steps:

  1. Open a trading account: First thing’s first, if you want to start using trading strategies then you’ll need a trading account. You can refer to our guide on finding the best online broker, which will give you an idea of the features to look out for, all of them you’ll find at CAPEX.
  2. Learn to read charts: There’s no getting around it; if you want to be successful as a trader then you need to learn how to read charts like the ones you’ll find on our platforms. Strategies like Donchian Channel are actually based around the charts, so it is especially important that you have a firm understanding of what all the numbers and patterns on screen actually mean.
  3. Choose your market: One of the biggest advantages of the Donchian Channel strategy is that it can be applied to pretty much any market. At CAPEX, we offer trading in over 2100 different instruments and you can use the Donchian approach on just about all of them. If you are just discovering the strategy for the first time, it’s best to concentrate on two or three markets. You can stick with one, but it’s good to see the principles of the strategy at work on different asset classes.
  4. Drawing the Donchian Channel lines: We’ve already touched upon what the three Donchian channel lines are based on: the upper line represents the asset’s highest price for the given time frame, the lower line represents the lowest price and the middle line is the average. Thankfully, adding these lines to your charts is easy as our trading platforms here at CAPEX have these tools built into their functions. Once the bands are in place, you can use them to identify trends within the asset’s price movement which then allows us to make informed predictions and find future opportunities.
  5. When to enter and exit a trade: There are a few ways that you can use the Donchian Channel strategy to choose when to enter and exit into trades. A lot of traders use the middle line as the key indicator, with the general approach being to go long when prices move above the middle line and to go short when it drops below. These positions can then, in theory, remain open until prices hit the upper or lower lines, depending on the order type.

Many traders will hold the position if the price rises steeply above the upper line, as this could indicate a bull market. The reverse is of course true for sudden drops outside of the lower band. However, positions should only be held open if the asset is trading consistently outside of the channel.

Also, at CAPEX you’ll be able to set limit and stop-loss orders, which would help you manage your risk better.




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Things to remember about the Donchian Channel strategy

By this stage, you might be considering incorporating the Donchian Channel strategy into your own trading. If that is the case, then you will quickly find out whether or not it fits with your individual style.

However, you should always bear in mind that creating channels is simply a different way to visualise an asset’s past price performance – there are no guarantees that trends will continue along the same lines. Therefore, you should always stick to your trading budget and not assume you are exposed to less risk because you are using a strategy.

If you want to try out the Donchian Channel strategy without risking any capital, then you can make use of a demo account with CAPEX. This will allow you to observe the Donchian Channels on real market prices and test out a few trades using the strategy.

Finally, remember that trading platforms offer you numerous tools – such as stop/loss or take/profit orders, which can help you mitigate losses if a position turns against you.

Conclusion – Trade CFDs and learn strategies at CAPEX

The Donchian Channel strategy is a popular alternative to the Bollinger Band strategy and has been put to good use by many traders over the years. Its longevity – having been developed in the 1950s – is testament to its effectiveness and versatility.

Of course, no strategy is foolproof and traders often rely on more than one such technique to improve their accuracy. It’s also worth bearing in mind that it takes practice to get a feel for a strategy and when it is likely to be reliable and when things look to be outside of its scope.

Whether you plan to trade forex, cryptocurrency, stocks or any other asset, the market-leading trading platforms offered by CAPEX allow you to implement just about any trading strategy you can think of.

Donchian Channel Strategy – FAQ

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