Donchian Channel is a technical analysis indicator used in trading to identify volatility and potential support and resistance levels. The indicator allows you to detect overbought and oversold market conditions when the price reaches the upper or lower band.
How does the indicator work?
The Donchian channel has three lines:
– Upper line – maximums for the selected period
– Middle line – average values for the selected period
– Lower line – minimums for the selected period
The channel helps to determine the price trend and its support and resistance levels.
An important feature of the indicator: channel width reflects market volatility – the wider the channel, the higher the volatility.
How to use it in trading?
Price crossing of one of the channel borders is considered as a signal to open a position:
– A candlestick touching the upper boundary is a sell signal
– Touching the candle’s lower boundary – a buy signal
* When trading the breakdown it is necessary to activate the reverse filter
Otherwise the indicator will send bounce signals.
So, the indicator can be used as a visualization of support and resistance levels. With the help of this you can determine where the stop loss will be located.
