Channels are one of the very first tools for analyzing markets. That’s why trading strategies based on channels are so popular in different markets. The difference of the various channel strategies from each other is only in the channel construction techniques. One of the most interesting and simple channel strategies is the Donchian channel strategy.
Richard Donchian is one of the legendary figures in trading, and he managed to achieve success at a rather respectable age and continued his work to a very old age. R. Donchian was a pioneer: in 1949 he organized the first futures fund Futures Inc., which became the prototype of mutual funds in the United States. In addition, his work has created a well-known system of Turtles. In the early 1970’s he developed a so-called sliding channel, which was later named after him – Donchian’s channel.
Career on Wall Street Donchian began in 1930. He began to sell the rapidly becoming popular Security Pilot service to brokerage companies. In the summer of 1933, Richard became a securities analyst for Hemphill, Noyes and Co, while still serving as vice president of the Samuel Rug Company family business.
During these years, Donchian developed the rules of trading operations on the basis of the “following the trend” trade method. It is based on the assumption that commodity prices in the long term will move like bear and bull markets. Richard developed and used a trading system that integrated the Rules of Trade, Guidance to Trading and its weekly rule system based on moving averages.
Donchian is the author of numerous articles on futures and securities, due to which he became known as the father of “trading by following the trend”. Some modern trend following systems such as the “Turtle Trading System” are based on his work. In addition, Donchian was an innovator in promoting the concept of a diversified approach to operations on commodity exchanges.
In 1963 the Institute of Chartered Financial Analysts of the University of Virginia awarded Donchian the degree of Chartered Financial Analyst. During his career Donchian was a member of stock exchanges:
• Commodity Exchange
• New York Cotton Exchange
• New York Futures Exchange,
and professional market associations:
• New York Society of Security Analysts;
• American Statistical Association;
• National Association of Future Trading Advisers;
• Financial Forum.
The Donchian channel is a volatility indicator that generates a price range at a specific point in time on the chart based on the maximum and minimum prices of the previous period asset. The indicator is displayed in the form of the upper and lower bands, for the construction of which the data obtained on the basis of the largest and the smallest price values calculation during a certain previous trading period are used.
The channel is constructed by taking the highest (maximum of High) and the lowest (minimum of Low) prices for the previous n periods, followed by the designation of the area between them on the chart:
DonchianChannel Upper = HH (n), the highest of all High values (Highest High) per n periods, the group
DonchianChannel Lower = LL (n), the lowest of all Low values (Lowest Low) for n periods
DonchianChannel Middle = (DonchianChannel Upper + DonchianChannel Lower) / 2
To configure the indicator on the Olymp Trade platform, go to a separate window for technical analysis and select the indicator in the Indicators form tab:
Richard Donchian recommended using the period 20 to build the Donchian channel. This means that on each candle the indicator analyzes the values of the previous 20 candles and finds the minimum and maximum values that both display the upper and lower bounds. It is not at all surprising that the period of 20 was recommended, considering that relatively recently trading meant trading mainly on daily and weekly charts, and 20 is just the average number of working days per month.
Nevertheless, the period of 20 turns out to be convenient for constructing the Donchian channel and for smaller timeframes. Also interesting are the results of constructing the channel with periods of 18, 24, etc. “Turtles” used period 55. The general view of the indicator will be the following: