Hello, there! I serve this article as my Beginner Level Homework. The class I attend is taught by Professor @lenonmc21 with the topic of Donchian Channel.
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Question 1
Explain and define in your own words what the Donchian Channels are?
Around 1950th, a professional trader named Richard Donchian developed a price indicator that is famous as the Donchian Channel today. Because of the need for financial market technical analysis to help traders in their trading matters such as measuring volatility, Richard Donchian invented the trading tool. Hence, businessmen can predict risk. Vital, a marketplace that has high volatility will cause rapid price movement while a market that has low volatility is the contradiction, thus, it is more stable. In addition, estimating volatility is one of the crucial instruments in doing business.
Donchian Channel has improved till today. It becomes easier to understand and to use, especially for beginner traders. It is readable and effective in showing the price chart in the market to help the traders in decision making. For experienced traders, they must be familiar with a trading indicator called Bollinger Bands. Accordingly, the usage of the Donchian Channel is pretty identical to the Bollinger Bands indicator. However, Donchian Channel provides us with the highest, the lowest, and average price trends in specific periods. Within these trends, the channel defines the Donchian Channel as the space between the two bands, the upper and the lower band.
Technically, Donchian Channel is one of the digital trading tools which displays the market chart on a timeframe. From the channel, we can indicate the trend of prices in the marketplace when the price is at its peak or the lowest point. It is named a channel because the shaded area which is connected seems like a channel. The Donchian Channel is a technical indicator for trading.
Traders should understand proper technical analysis. So, traders can determine entry timings to enter the world of trading. If someone decided to trade just because of public opinion or 'want to do so without research, he could be too late or too soon to enter the commodity market. As we have learned, market movements are too dynamic. At the same time, we have to be ready to adapt to the market condition if we do not want to lose in trading.
Question 2
Does it explain in detail how Donchian Channels are calculated (without copying and pasting from the internet)?
As mentioned above, Donchian Channel provides us with a feature of timeframe to analyze the trends happening on the market. This timeframe feature is in the default settings in 20 days. Nevertheless, traders are free to set up the period time as they want. The timeframe we discussed consists of a second, minute, hour, day, week and, even month. In the Donchian Channel discussion, we will use variable n to indicate the number of periods.
Furthermore, there are starting points to calculate by using the Donchian Channel as those depend on what we are willing to identify. Generally, traders are going to identify three channels. They are Upper Channel, Lower Channel, and Mean or Median Channel.
- Upper Channel
The special rule which works to identify Upper Channel is:
To begin with, we have to appoint n, the specific period time. Then, start to compare the high prices over the timeframe that was already selected and choose the highest print. Accordingly, the result will show up.
- Lower Channel
Practically, it is the same as how to indicate the Upper Channel. In contrast, here we have to select the lower price as the special rule below which works on this:
- Median or Mean Channel
As a math formula in identifying mean or median, we must divide the results of two data by two. We have to add the final of the Upper Channel and Lower Channel. Then, the final result divides into two. The short rule is as follows:
It is important to note that no indicator tool provides exact prices in real-time.
Question 3
Explain the different types of uses and interpretations of Donchian Channels (With examples of bullish and bearish trades)?
Donchian Channel can assist traders and investors to indicate certain areas that happened on the market. By knowing what is going on in the market, traders and investors can determine the decision-making regarding investment matters. Those areas to indicate are as follows:
1. Trends
We can identify trends that occur in the crypto market pairs by using the Donchian Channel. It could be a bearish trend, bullish trend, or even sideways where the trend is just relatively in the horizontal line.
Moreover, a bearish trend is a downtrend that is created on the graph. It keeps falling and creates a new lowest point. In contrast, a bullish trend is an uptrend that is displayed on the chart. It will go up and create a new highest point.
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2. Overbought and Oversold
In every chart that touches either the lowest point or the highest point, there is a possibility that the market is in the overbought or oversold area. Usually, traders or investors will choose to buy when the price hits the lowest point.
On the other hand, traders tend to sell when the Donchian Channel gives a signal that the market is on the oversold zone by figuring out that the chart reached its highest point. The overbought and oversold shown by the Donchian Channel is simply could be wrong. Beginners will feel anxious and make a wrong predictions, frequently when facing the situation. Errors in decision-making occur because of the influence of the psychology of traders or investors themselves.
3. Volatility
As I mentioned in the trends section, sometimes we can find trends that move horizontally. This trend is named sideways. When sideways occur, the market is in a ranging phase where market volatility is low. Therefore, prices are relatively stable. In addition, we can also identify when market volatility is rising. It can be seen when the highest point and the lowest point are very far apart.
Traders or investors should always take a look at the chart carefully if the volatility is high unless they can lose.
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The survey mentioned that traders are better using other technical indicators like oscillators or scholastic along with Donchian Channel to confirm the overbought and oversold areas.
Practice
To be honest, this is my first time trying a trading tool, especially in the demo account. I am confused but I am trying my best to understand and perform well. Hence, here are the following steps I took for trading practice on tradingview.com:
- First: I visit the website and log in to the website ( I just signed up for my account).
- Second: Set the market that I tend to analyze. In this case, I chose Ethereum / US Dollar.
- Third: At the bottom, I select the trading panel which is Paper Trading to conduct the demo.
- Fourth: Then, click the indicators and choose Donchian Channel. I am a little bit confused at this stage since there are some similar names of strategies in the list.
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- Fifth: Set the input to 20 in length column to set the time frame.
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Donchian Channel Breakout Strategy
In the Donchian Channel Breakout Strategy, traders will figure out the new points either the highest price or the lowest price. Every time the more point added, it is called a breakout. It is probably that the same pattern will continue to appear. Traders and investors should sell when the price keeps going up and sell when the price keeps going down.
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Reversal and Retracement Strategy
In the Reversal and Retracement Strategy, traders and investors should take a look for new points that cross the center band or middle range. The middle range is an orange line located in the middle between the upper and lower bands. It could be a reverse trend when we find the new point that crosses the center band.
As what happened on the market of Ethereum/USD crypto pairs, the breakout line that passes through the center band is small. In my opinion, judging from the trend, the next trend probably will not change drastically. Unless it passes in a quite big price, then, it could be a reverse trend.
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Special thanks to all professors on the Steemit Crypto Academy for giving extraordinary classes about cryptocurrencies and blockchain.
Writer,
@idaali