Donchian Channel Daily TradingSystem is a trend following strategy.
The time frames used:
In this trading system we will be usinga classic system that many successful traders use.
It involves using the daily chart andthe 4 hour chart only.
The daily chart is used to determinethe trend and direction and the 4 hour chart is used to time theentry.
The indicators used:
This strategy mainly revolves aroundthe Donchian channel indicator.
The Donchian channels are added both tothe daily chart and the 4 hour chart.
The setting for the Donchian channeldaily chart is 20 and the Donchian channel setting for the 4 hourchart is 55 which is a
typical Fibonacci number
We will also be using the typical 200day moving average (set at the close) for the daily chart. This willhelp visually determine
the trend and the strength based on theangle of the moving average and distance of price from it.
The last indicator used in thisstrategy is the Stochastics on both daily and four hour charts set at14, 3, 3.
Step one:
Always trade in the direction of thetrend! (price above the 200 day moving average on the daily chart,then only trade up and
vice versa)
The decision is up to you to determinethe strongest trending currency pair. You will notice the angle ofthe moving average and
the distance of price in relation tothe moving average. It is still possible to trade a pair that is nottrending as strong but it is
preferred to use the strongest trendingpair.
In this manual we have a perfectexample of a pair (GBP/USD) that is still in an uptrend according tothe position of price in
relation to the moving average. (pleasesee chart below)
The set up:
In this example we will assume that weare looking for a trade in a up trend and a long position.
We will also need to use the A, B, C,price swing method, (not to be confused with Elliott Wave)
We will be looking on the daily chartfor price to remain above the 200 day ma but touching the lowerchannel of the Donchian channel indicator. This should preferablyoccur at the “C” in a pull back during a trend up. (please seechart 1 below)
In chart 1 above, we start looking foran entry when we can confirm that price is above the 200 day ma andstill in an uptrend.
When price returns to the lowerDonchian channel, we switch to the 4 hour chart and look for theentry to go long again assuming that the trend is going to remain intact. Once we enter the trade from the 4 hour chart, we switch backto the daily chart to manage the trade. In the next two charts below,we will see a recent (as of this writing) trading opportunity and howwe use both time frames. Chart 2 Recent trading opportunity/ example.GBP/USD daily chart
In the chart above, we see that priceis still above the 200 day ma and price has returned to the lowerDonchian channel.
This is the first step to identifying atrading opportunity. Until price touches the upper or lower Donchianchannel we don't do anything but wait or look at another currencypair for a trade.
Now we switch to the 4 hour chart andlook for the entry. (please see chart 3 for 4 hour chart)
In the four hour chart above, we cansee that the Stochastics has been in the “extreme” level and isreturning back up. Now we use a Donchian channel indicator set at 55and wait until price touches the upper Donchian channel at the highwhere the arrow is, plus one pip. This would also theoreticallyconfirm the uptrend when price starts to break out to the upsideagain. As you can see this will require a large stop placement.
The exit: (take profit)
We exit the trade when price in thisexample, returns back to the lower Donchian channel on the fourchart.
Trailing stop:
You can move the stop up (in thisexample) when price takes out the last high and makes a new high,then set the stop just below the last swing low.
Closing: Trading on a larger time framelike the daily and four hour charts can eliminate the pressure ofintraday trading. This is only good for certain personalities. Othersprefer constant activity on a hour by hour basis. No matter whichtrading style is right for you, you must consider the leveragerequired to trade any method.
Obviously we are all looking for asmany trading opportunities as possible but I think we would allprefer a method that is comfortable, profitable and provides a goodrate of return.
