Created by Richard Donchian, the Donchian Channel indicator is a technical tool that can be sued in capturing price movement and price trend correctly. The indicator has just one adjustable input i.e. the number of past trading sessions, or bars to count, which comes with a default value of 20.
The indicator uses the value 20 of the Bars to count to compute the Upper and Lower Bands. The Upper Band represents the period’s highest price reached, while the period’s lowest price is represented by the Lower Band.
The middle bar depicts the mean of the two bands. The value of the highest high, lowest low and their mean is computed to eventually represent most recent support and resistance levels.
The measurement of volatility is the core function of the Donchian Channels. The bands tend to widen when volatility widens, and they contract when volatility is low.
The overbought territory is essentially the area around the Upper Band, while oversold territory is the area around the Lower Band. Hence, during a bullish trend, price action around the overbought territory may point to a consolidating trend (particularly if the price action occurs more frequently during the trend).
A bearish trend is consolidating if we have frequent price actions around the oversold territory. Getting the most off the Donchian Channels is achieved when the overall trend is known.
It is clear that the Donchian Channel method offers clear levels at which to buy and sell as a mechanical system ought to. However, the Donchain Channel will not pinpoint tops or bottoms, as it can be exposed to considerable losses from abrupt price moves or from whipsaw positions in range-bound markets.
MT4 Indicator Characteristics
Currency pairs: Any
Platform: Metatrader 4
Type: chart pattern indicator
Customization options: Variable (Bars To Count), colors, width & Style.
Time frames: 5-Minutes, 15-Minutes, 30-Minutes, 1-Hour, 4-Hours, 1-Day, 1-Week