Donchian Channels

Discussion in 'Technical Analysis' started by Champion, Sep 2, 2006.

  1. I was just trying to get more input on Donchian Channels. To tell you the truth theres not much on them in ET back threads. Seems to be neat for following market direction. Any DC users on ET? Any other comment from anyone?
     
  2. Donchian Channels were introduced by Richard Donchian, a pioneer in the field of trend following.
    The Donchian Channel is a simple trend following breakout system. The Donchian Channel works well in trending markets, but doesn't work well in a sideways channel. The signals derived from the Price Channel are based on the following basic rules:

    When price closes above the Donchian Channel, buy long and cover short positions.
    When price closes below the Donchian Channel, sell short and liquidate long positions.

    The Donchian Channel indicator is not meant to catch tops or bottoms, only trends. Trend traders may want to extend the standard 4 week period to 8 weeks in order to wait for significant trend signals, while others may shorten the period to a more sensitive 1 or 2 weeks for liquidation purposes.
     
  3. Investopedia

    http://www.investopedia.com/terms/d/donchianchannels.asp


    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time intervals.


    The Donchian Channel is a simple trend-following breakout system. The signals derived from this system are based on the following basic rules:

    1. When price closes above the Donchian Channel, buy long and cover short positions.
    2. When price closes below the Donchian Channel, sell short and liquidate long positions.
     
  4. nkhoi

    nkhoi Moderator

  5. I've tried the Donchian and many other envelopes but never been entirely happy with any of them.
    When able to be applied I find the Standard Error Channel does a very good job.
    The chart illustrates the T3 which might be described as a more efficient or smoothed MA and is the best tool I've come across so far that 'cuts' the Price for B/S signals.

    T3 MetaStock formula:

    Periods:=Input("Periods?",1,63,5);
    a:=Input("Hot?",0,2,.7);
    e1:=Mov(P,Periods,E); {change P to H, L or O}
    e2:=Mov(e1,Periods,E);
    e3:=Mov(e2,Periods,E);
    e4:=Mov(e3,Periods,E);
    e5:=Mov(e4,Periods,E);
    e6:=Mov(e5,Periods,E);
    c1:=-a*a*a;
    c2:=3*a*a+3*a*a*a;
    c3:=-6*a*a-3*a-3*a*a*a;
    c4:=1+3*a+a*a*a+3*a*a;
    c1*e6+c2*e5+c3*e4+c4*e3;

    edit: just discovered (!!!) entering 1.25 for instance in Hot produces a better higher/lower 'cut' with T3 P.
     
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  6. Thanks for contributions ElectricSavant, nkhoi, Wallace. If the direction is not too shallow price sticks to the left of the Donchian. Just hold for duration of the move.
     
  7. These are the results of a long term stock simulation using Consolidated Edison stock, symbol ED. The simulation is over 36.59 years from 2 January 1970 to 28 July 2006. Donchian channel parameters used are 90 days entry, 240 days exit, 10 percent risk. Position size is equal to 10 percent of equity divided by the difference between the 90 day high price and 240 day low price.

    Number of trades 8
    Total profit $ 3134673
    Profit after subtracting $ 10.00 commission, slippage per transaction: $ 3134513
    Risk is 10.00 per cent of equity.
    Drawdown is -0.0000 (-0.00 per cent).
    Cumulative Annual Growth Rate (CAGR) is 85.67 per cent.
    CAGR / Drawdown is infinity.
    Instanteously Compounding Annual Growth Rate (ICAGR) is 9.50 per cent.
    Annually Compounding Annual Growth Rate (ACAGR) is 9.97 per cent.
    Information Ratio is 0.93
    Initial capital is $ 100000
    Long trades only.
    Growth rates are calculated after subtracting commission & slippage.

    ===

    Growth rate is about 86 percent per year and there are no losing trades.