The Donchian trading strategy is an intraday trend following strategy that allows you to profit from the intraday trends. Our team at Trading Strategy guides will share some ideas and trading tricks that daytraders and intraday traders can use to catch runaway markets.
It’s important to understand the different characteristics of an intraday trend and long-term trends. In this regard, our team has developed the best Donchian trading strategy that uses a proprietary trading pattern – Crawling Along Pattern – revealed for the first time to the general public.
The crawl pattern, in particular, offers a variety of advantages.
The main advantage is its ability to spot day trends that have the potential to continue after the first pullback.
It’s no secret that being a profitable daytrader requires the ability to spot day trends. We dare to say that the Donchian channel strategy PDF offers you the chance to make some easy money.
Although the Donchian channel might look similar to the Bollinger Bands, they are different. Unlike the Bollinger Bands, Donchian bands are calculated using a simple math formula that only uses the recent high and low prices.
What Is Donchian Channel?
Richard Donchian, also known as the father of trend trading, created the Donchian trading system back in 1936. The Donchian Channel is a simple yet very versatile technical indicator.
Channel trading strategies can help traders identify whether a price movement is likely to continue or reverse direction.
The Donchian Channel is also known as the price channel, and they can help you identify the following:
- Gauge the trend.
- Market Swing highs and lows.
- Support and Resistance levels.
- Market volatility.
- Spotting breakouts.
The Donchian Channel indicator can be used to identify price breakouts above resistance levels and breakouts below support levels. You will have a better understanding of how to identify breakouts using the Donchian indicator.
However, the Donchian trading strategy performs best, especially in trading markets.
The Donchian Channel accomplishes all the above features by blotting three moving averages or bands that form a price channel. The channel periods are determined by a user-defined period, and our preferred settings for the Donchian indicator is 20-periods.
This means that the Donchian channel will look back for the highest high and the lowest low price over the last 20 candlesticks on your chart and then plot that value. On top of that, we also have the median line drawn in the center. The median line is simply the average of the other two Donchian lines plotted on the chart.
Note* Feel free to backtest different period values to find the best settings for the Donchian channel.
The Donchian Channel will eliminate a lot of the guesswork out of the equation when trading the markets.
Now, we’re going to put this day trading strategy to work. Please remember we cannot guarantee that any of the results we’re about to share with you will be repeated in the future. Here is another strategy called Time-Based Trading Strategy.
Donchian Trading Strategy
Richard Donchian had some interesting trading rules about the technical aspects of the price action. We’re going to break down one trading secret that has never been exposed before.
It’s easy to understand because it has clear trading rules that everyone can follow and ultimately benefit from it.
The Donchian trading strategy says that when we have a trading market that can be encapsulated inside a channel, the market will start to crawl along the upper end of the channel. This can lead to a potential breakout of that channel.
Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules of this entry method.
For this article, we’re going to look at the buy-side.
Step #1: Attach the Donchian channel indicator to your chart. Preferred setting 20 periods.
For the purpose of this example, we’re going to plot the Donchian channel on the 15-minute time frame. The preferred Donchian channel settings are 20-periods, which means that the channel lines will be calculated based on the price action from the last 5 hour candles.
Note* The Donchian indicator is a free pre-build technical indicator that comes free with most trading platforms. Also, check out our best fractal trading strategy.
The next step will outline the characteristics of the Crawling Along pattern.
Step #2: Wait until the price crawls along the upper Donchian Channel. The price should not go below the middle band during this stage.
It’s quite easy to visualize the Crawling Along pattern. When the price action touches the upper Donchian channel, and it stays glued to the upper line, we create the price effect where the price looks like it’s crawling along the top Donchian line.
If you think in terms of supply and demand, when the price is crawling along the upper Donchian channel without departing too far away, it means there are lots of buyers trying to push the price higher. This eventually leads to the seller capitulating once the breakout happens.
Another characteristic of the crawling pattern is that during this stage, the price shouldn’t go below the middle Donchian band.
Note* The closer the price action moves along the upper band, the stronger the trend is.
If you spot this type of price action, then you know this day trend has a big potential for following through.
Now, all we got to do is to outline the rules of our entry strategy.
Step #3: Buy1 when the price pulls back to the middle Donchian band. Buy2 when the price pulls back to the lower Donchian band.
The channel width gives us a measurement of market volatility. When we have high volatility in the market, this will be shown on the chart by wide channel bands, whereas low volatility will be displayed on the chart by a narrow channel.
Like with all technical indicators the Donchian channel can be subject to false signals from whipsaws and sizeable market swings. Breakouts are very hard to trade, and that is the reason why we prefer to enter on pullbacks.
We recommend splitting your trade into two parts as this will give you a better average entry price.
The first buy order is deployed when the price pulls back to the middle Donchian band while the second buy order is deployed when the price retraces all the way to the lower Donchian band.
Our entry strategy will give us the opportunity to implement proper risk management.
This entry strategy is a good way of framing a trade. So, you have a very specific entry point.
By sticking to these entry rules, you will realize this is not a bad trade to take because you trade in the direction of the prevailing trend.
This brings us to the next important thing that we need to establish for the best Donchian channel strategy PDF, which is where to place our protective stop loss.
Step #4: Hide your protective Stop Loss below the lower Donchian band.
Your stop loss can be placed below the lower Donchian band. The catch is that you need to move to the left side of the chart and find the first part of the lower Donchian band where it is flat.
You’ll find that oftentimes the Donchian channel will plot perfectly flat lines. This can provide us with excellent spots to hide our stop loss.
Last but not least, we also need to define where we take profits.
Step #5: Take profit at the end of the day or if you want to ride the trend.
The beauty of the Donchian trading strategy is that you can apply multiple exit strategies so you can maximize your profits.
Now, that we know that the supply and demand balance is skewed to the upside, we can expect buyers to step in on retracements faster than they have before. This can indicate that we’ll have a buy explosion to the upside.
The first proposed exit strategy is to liquidate your position at the end of the day. Since we’re trying to take advantage only of the intraday trends we don’t want to have any overnight exposure.
Secondly, you can wait until the price breaks below the most recent flat lower Donchian band.
Note** the above was an example of a BUY trade using our Donchian Channel Strategy PDF. Use the same rules for a SELL trade – but in reverse. In the figure below, you can see an actual SELL trade example.
Conclusion – Donchian Channel Strategy PDF
The Donchian trading strategy really offers you a unique way of spotting day trends with outstanding risk to reward ratios. This is a very powerful trend indicator and as we have proven through our live trade examples, there is no mistake of calling Richard Donchian as the “father of trend following.”
This intraday strategy besides providing you with simple rules to trade with the Donchian channel, it also highlights some universal trading truths that can easily be incorporated into your current trading strategy.
You may also enjoy learning about other intraday trading strategies.
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