Hello everyone. I am glad to participate in another assignment in season 5 of steemit crypto academy. This homework task is for professor @lenonmc21 whic is about Strategy and use of Donchian Channels.
Source
Explain and define in your own words what Donchian Channels are?
Multiple tools have been used in the crypto world to analyze the market. The analysis of market is main and key factor of successful trading. A lot of indicators are there to analyze the market behavior. The traders predict the future of market using these indicators and then take the trading decisions accordingly.
Donchain channel is also leading indicator which is use to identify the market trend. This indicator have resemblance with the Bollinger band. This tool is use to determine what trend is going on in the market and where the moving is moving. This indicator is named after its investor, Richard Donchain.
There are three bands in the Donchain which are the lower band, Middle band and upper band. These bands are used in the market to determine the movement of the market price. The bands are calculated from the moving average and when the volatility of the asset price is high, the bands expand dramatically
When the volatility of the assets price is low, the bands will contract. In a specified time period, the lower band is the lowest security value and show the lowest price of the coin. And upper band is the highest security value and show highest price of the coin for the specified time period. If we talk about the middle band, it is average of the upper and lower limit. This indicator can be use to predict where the market will move next, what will be the next market trend.
When the price of the asset rise and touch the upper band, it produce an over bought signal. This indicate that the market is in overbought region. The buying pressure is high as compare to the selling pressure.
Similarly when the price fall and touch the lower band, an oversold signal is produce. This indicate that market is in oversold region. The buying pressure is low than selling pressure. Because of high selling pressure, the demand is low and supply is high. And price is moving downward. The future market price can be determine using this indicator.
This is highly useful indicator which show how much volatility is there in market. The traders may use this indicator to get the entry and exit spot and using the information, they may get high profit. This indicator mark the highest high and lowest low of market for a specific time period. The traders use this indicator to find out whether the market continue its trend or trend will reverse.
Question 2.) Does it explain in detail how Donchian Channels are calculated (without copying and pasting from the internet)?
The Donchain channel is easy to calculate . The time frame is use to calculate this indicator. The upper and lower bands are form according to the time period which is entered. The time period is set as 20 by default. It have three bands which are lower band, upper band and middle band.
.png)
First of all, we need to set the time frame for which we want to apply the Donchain channel indicator. It can be set by clicking on the setting icon. There are multiple options like minutes, hours, days, week, etc. Choose time frame according to your own trading strategy. The highest value of the coin for the time period which you set is use to get the upper band value. The lowest value of the coin in that time period is use to get the value of the lower band. The average of these two values is the value of the middle band.
- Lower band= The lowest value of coin in specific time period.
- Upper band= The highest value of coin in a specific time period.
- Middle band= Lowest band + Highest band /2
.png)
For example i have the above chart. where the
- lower band value for the last 20 candle sticks is = 57577. 74
- Upper band value for last 20 candle stickes is = 58630.10
- Middle band value = 57577.74 + 58630.10 / 2
- Donchain channel = 116,207.84
- Donchain channel = 58,103.92
Question 3.) Explain the different types of uses and interpretations of Donchian Channels (With examples of bullish and bearish trades)?
1- Overbought and Oversold Region
The donchain channel can be use to determine whether the market is in overbought region or oversold region. This indicator is highly useful to identify the market region. When the price of the coin touch the upper band, there is high possibility that market is in overbought region. The overbought region indicate that the buying pressure is high as compare to the selling pressure. The demand is high and supply is low which result in increase in price. That's why the price rise upward and touch the upper band.
When the price of the coin touch the lower band, there is high possibility that market is in oversold region. The oversold region indicate that the buying pressure is low as compare to the selling pressure. The demand is low and supply is high which result in decrease in price. That's why the price fall downward and touch the lower band. This indicate the oversold market region.
.png)
2- Trend reversal
This indicator can be use the trend reversal. We have talked above that we can find out the market region/zone using the Donchain channel indicator. When it is the overbought region and price of coin touch the upper band, there is possibility that the trend is about to reverse and market will start moving downward. When the oversold region is observe in the market and price touch the lower limit, it is expected that now trend will reverse from downtrend to uptrend and price will start moving upward.
.png)
3- Volatility
This indicator is highly useful to find out the price volatility for a specific time period. There are three bands in the Donchain channel indicator which are lower band, upper band and middle band. When the distance between lower band and upper band is small it indicate that the market volatility is low. When the distance between the lower band and upper band is large, it indicate that the market volatility is high.
.png)
.png)
4- Strong Trend
The donchain channel indicator can be use to find out whether a trend is strong or week. When price rise up and touch the upperband, this indicate that the market is in uptrend When the price of the coin tend to move in same direction and stick to that direction, this show that the uptrend is strong. Similarly when the price fall and touch the lower band, it indicate that the market is in downtrend. When the price of coin tend to move downward in same direction and stick to that direction, this show that the downtrend is strong.
.png)
.png)
Practice (Remember to use your own images and put your username)
Make 1 inning using the "Donchian Channel Breakout Strategy" and make 1 inning using the "Reversal and Retracement Strategy". You must explain the step by step of how you analyzed to take your entry and make them into a demo account so that I can evaluate how the operation was taken.
"Donchian Channel Breakout Strategy"
.png)
I have used the Binance coin USDT pair to answer this question. I will make purchase using the coinmarketcap.com. The market is in downtrend. The candle touch the lower band on 20 november and continue to move downward. This is market oversold region. It is expected that now the trend will reverse and price will rise up. SO i decide to make a purchase at this spot because price is low and it is good entry spot. I bought the coin at 578.0$ on 20 november 16:30PM. and hope that it will rise up soon.
"Reversal and Retracement Strategy".
This is highly useful and easy strategy which result is reduce of lose and high profit if use properly. It all about the candle which penetrate the middle band. If the green candle penetrate the middle band, it produce the buy signal because it is predict that the price of coin will continue to move upward. So it is best to enter into the market buy buying coin to get profit in future. And if the red candle penetrate the middle band, it produce the sell signal because it is expected that price will fall more. So it is best to exit from the market by selling coin to get profit and to safe from lose.
.png)
The Above screen short showing that the red or bearish candle penerate the middle band. SO i will sell my coins. The candle hit the middle band at 12 of 20 November. This produced the sell signal I sold my coin in 40.60$. I can see that the coin price is still declining.
Conclusion
Donchain channel is also leading indicator which is use to identify the market trend. This indicator have resemblance with the Bollinger band.
There are three bands in the Donchain which are the lower band, Middle band and upper band. These bands are used in the market to determine the movement of the market price. The bands are calculated from the moving average and when the volatility of the asset price is high, the bands expand dramatically. This indicator can be use to indentify whether market is over bought region or oversold region. This indicator can be use to predict where the market will move next, what will be the next market trend.
This is highly useful indicator which show how much volatility is there in market. The traders may use this indicator to get the entry and exit spot and using the information, they may get high profit. This indicator mark the highest high and lowest low of market for a specific time period. The traders use this indicator to find out whether the market continue its trend or trend will reverse. I am thankful to professor @lenonmc21 for this lesson.
All screen shorts are taken from the trading view site.