Donchian - Crypto Academy/S5W1 - Homework post for @lenonmc21 - by @kingworldline

1) EXPLAIN AND DEFINE IN YOUR OWN WORDS WHAT DONCHIAN CHANNELS ARE?

This indicator is formed. Then the channel in the period choosen is the area between the high and low.
This indicator is found in many trading platforms. To show visibly the channel on the market price or other values, lines are used to indicate or mark the high and low values on the charting programme. To show the volatility of a market price, provision of signals for short and long positions, show breakout of trend, trend reversals, to show overbought and oversold conditions in the market etc; Donchian channel is used.
This indicator is comprised of 3 separate bands. This is generated by moving average calculations. These bands are mid-range band which is the central pay of the indicator, the lower band, and the upper band.The band that shows the highest price of the security is the upper band, the lower band shows the lowest price , the mid -band that is the band in the middle is the average of the highest and lowest bands. Donchian channel can be used per minute, hourly, weekly and even in other charts.This indicator so far is believed to be the more suitable tool because it is very easy to interpret by anyone.

2) EXPLAIN IN DETAILS HOW DONCHIAN CHANNELS ARE CALCULATED WITHOUT COPYING AND PASTING FROM THE INTERNET?

In calculating the Donchian channels,factors that are very necessary are; number of periods in the highest high and number of periods in the lowest low. Also, it depends on the number of periods one decides to use. For instance, I decide to use a 20- day period, the indicator would look this way:
Upper channel= 20 day high
Lower channell= 20 day low
Middle channel = 20+20/2
That is 20-day high+20-day low/2
This shows that I picked the highest price at the 20-day period, adding it to lowest price at the 20-day period then divide it by 2 to get the middle channel.

3) EXPLAIN THE DIFFERENT TYPES OF USES AND INTERPRETATION OF DONCHIAN CHANNELS( WITH EXAMPLES OF BULLISH AND BEARISH TRADE)?

Interpretation of Donchian channels: Wideness
Positioning of the periods or bands of indicator show that there is a high volatility in the market. However, when there is a stability of market price and calmness in the market, the bands or periods become narrower. Overbought occurs when the price reaches the upper band but if it gets to the lower band, it is said to be an oversold. Donchian Channels help the traders to know the strength of the trend. Strengthening trend occurs when the price moves into the overbought territory/ breaks the upper line when there is a bullish market. Also, weak or negative trend conditions occur when the price moves into the oversold territory or breaks the lower band during a bearish market. This shows that the way the price reacts within the upper bands and lower bands indicates the start of a long-term trend and reversal of the existing one
When To Use Donchian Channels.
Combining other technical tools for analysis such as trend-lines, Directional Movement Indicator( DMI), Average Directional Index (ADI), Relative Strength Index ( RSI) with the Donchian Channels is very much recommended and also very effecient espcially when there is a clearly defined trend and also when trading using chart is on long-term basis. One thing worthy of note is that the user of this indicator Should confirm the signals it generated with other indicators despite your your
Donchian Channels Trading Strategies.
When you use This indicator on its own, it is far from flawless but when you use it with other indicators, it works best and it is more valuable. With these strategies,Donchian channels indicator can be used to spot breakout of trend, reversals and pullback of trend.
Breakout Strategy: Donchain channel is an example of a trend following indicator. Donchian channel bands are breakoutlines. You must watch closely on the price behaviour around the indicator's upper and lower lines for you to use this strategy. This strategy is more effective and efficient if applied on short or medium- term intervals. A bearish signal occurs when there is a breakout in the lower band or period. This gives one chance to place a trade or order to captured one's profits before the price drops. One thing of note here is that Donchian channels indicator often generates false breakout signals, to prevent it, you must wait for the price to close above upper or lower band. Combination of Average Directional t en s ures efficiency. This helps to measure the strength of the trend and the viability of the trading.
Reversal trading strategy: In order to succeed using this strategy, you must keep your eye off the median band of the indicator. One's ability to spot potential upcoming reversals, one can exit trades and enters new ones early so as to track high profit potential opportunities. Reversal strategy requires that you wait until there is a reversal in the market price. Note also that when applying this strategy, you must wait for the trigger and not try to forecast before opening a position.
Pullback strategy: Donchian Channel indicator is not an indicator of a long-term strategy. watching very closely on the median line is what ensures accuracy in the usage.
This is because it is detrimental to the correct identification of buy and sell signals. picking out the optimal entry points when the market is trending is what this strategy represents. By this way, one can get a more precise and accurate indication of the market trend whether it is really overbought or oversold.

ADVANTAGES OF DONCHIAN CHANNELS.

1. This indicator is a multi-purpose indicator.

2. It is a great way to visualize volatility and plot the price's historical performance.

3. Donchian Channel is suitable for many time frames, e.g per minute,hourly, weekly etc.

4. It is very easy to apply and interpret by anyone even the beginners.

5. This indicator works well in non-trending markets.

6. It also works with all classes of asset

DISADVANTAGES.

1. It is not efficiently used alone.
2. Donchian Channels are prone to generating false Breakout signals.
3. It relies on historical data and this may reflect current market conditions.
4. Donchian Channel can identify cyclical moves.
5. It requires constant presence on the markets.
6. Donchian Channels put equal weight on all data points.

PRACTICAL

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