The Donchain Channel Breakout System was developed by Richard Donchain in the mid of 20th century to identify the trends. He is known as ‘The Father Of Trend Following’ respecting his contributions. The Donchain Channel Breakout system consists of three lines, generated by the calculations that form the lower and upper band around a mid-day range.
The upper band marks the peak price of an asset over the N period, whereas the lower band marks the lowest price of an asset over the N periods.
This indicator identifies the relationship between the current price and trading ranges over a specific period. The area between the lower band and the upper band represents the Donchain channel. For intraday trading, traders used this indicator for identifying the trend as well as trading ranges. The Donchain Channels works very well on all the timeframes.
The indicator has 3 parts to it:
- 20-Day high is the upper band.
- 20-Day low is the lower band.
- The average of the upper and lower band is the middle band.
Here’s how it looks like on a chart.
Installing Donchain Channels To MT4
By default, the Donchain Channel Indicator is not available in the MT4 Terminal, but it is available on the internet. Follow the link below to download the same.
Download the zip file from the above link and extract the files.
Paste the extracted files to your MT4 directory/MQL4.
Make sure to paste it in the ‘indicators’ folder.
Restart your MT4 Terminal.
Click on the Insert > Indicator > Custom > Donchain Channels
As you can see, we have applied the indicator on to the EUR/JPY Chart.
Donchain Channels – Trading Strategies
Donchain Channels + MACD Indicator
In this strategy, we have paired the Donchain channels with the MACD indicator. MACD indicator stands for Moving Average Convergence and Divergence. It is an oscillator used by the traders to trade trends. It consists of two lines, the MACD line and the signal line.
The strategy is to see the MACD indicator when the price hit the lower band of the Donchain channels. If the MACD indicator is giving a reversal at an oversold area, we can consider that as a reliable buy signal.
In the below NZD/USD chart, just when the prices hit the lower band, MACD indicator is giving a reversal at the oversold area. Hence it is a buy signal for us. Since MACD is a trend following indicator, make sure to close your trades when the MACD lines reach the overbought area.
The strategy is to see the MACD indicator when the price hit the upper band of the Donchain channels. If the MACD indicator is giving a reversal at an overbought area, we can consider that as a reliable sell signal.
The image below is an NZD/USD 4-hour chart. As you can see, the pullback was extremely volatile. When prices hit the upper band of the Donchain channels, MACD was also at the overbought showing a reversal to the downside. Hence it is a genuine sell signal to us.
In a volatile market, always put the stop-loss above the strong resistance area. This is recommended because some times markets often spike before moving into the original direction. During the active market hours, forex pairs are volatile and this strategy often gives us more buy/sell signals. This strategy works on all the timeframes. If you are an intraday trader then always use this strategy on the 15, 30 and 60-minute timeframes. If you want to scalp the market on the lower timeframes, such as 3 minute or 1-minute, we suggest you to master this strategy on the higher timeframes first. Because lower timeframes move very fast and it is very hard to handle that for a novice trader.
Donchain Channels + Arnaud Legoux Moving Average
In this strategy, we have paired the Donchain channels with the Arnaud Legoux Moving Average. ALMA indicator is a recent addition to the family of Moving Averages. The reason we are using ALMA instead of Simple Moving Average is that the calculation of the ALMA is more perfect than the Mas. Also, it shows minimal lags, hence making it a leading indicator.
When compared to the simple moving average, the ALMA has some of the additional settings. In this strategy, we are not going to use the default parameters of ALMA. Below we share our proven values of ALMA indicator, which works very well in trending market only.
- Set Window Size to 46
- Off-set to 1.2
- Sigma to 6
The strategy is as follows: When the ALMA indicator goes below the price action and hit the lower band of Donchain Channels, we can consider that as a buy signal.
As you can see in the below chart, we have got two buy signals in the EUR/JPY pair. You can see how accurately the ALMA indicator predicts market reversal when paired with the Donchain Channels. This is a proven strategy and is tested by the experienced in-house Ditto traders. Donchain bands act as support/resistance levels for the price action. So it is safe to put the stop-loss below the lower band and book the profit when the ALMA indicator goes above the price action.
When the ALMA indicator goes above the price action and hit the upper band of Donchain Channels, we can consider that as a sell signal.
In the below GBP/CHF chart, the pair was in an overall downtrend. Our strategy gave us a couple of the most credible sell signals. Both the times, we can see how the markets shot down in a couple of hours.
We suggest you to always use this strategy in a trending market. Because the settings we used for the ALMA indicator spot the buy/sell signals ahead of time in a trending market. But in a ranging market, ALMA often fails.
Donchain channel is a simple and effective indicator to detect n-period breakouts.
This indicator is typically useful to identify the price breakouts. If you are an intraday trader, use the values lower than 10 and if you trade the higher timeframes, then use the values above 20.
Some traders use 15-period value for entering a trade and 10-period value to exit. You can also use these values, but you will have to apply two Donchain Channels on the chart. But that’s a topic for another article on Donchain channels.
By now we believe that you have understood the concept of this indicator. Try incorporating this in your daily trading activities and let us know the results in the comments below. Best of luck!