the reason for starting this thread is, to provide a place for discussion about Donchian Channels…
the Donchian Channels were developed by Richard Donchian and show the highest high and lowest low for the last [I]n[/I] periods (with 20 periods being the standard in most platforms)…
there are different ways to use the Donchian Channels…
[B]one channel[/B]
buy on breakout of the upper line or sell on breakout of the lower line, being the opposite line the trailing SL…this way the trader has always an open position of the traded instrument…
[B]two channels[/B]
e.g. 10 and 20 period Donchian Channels…the trader would place entry orders at the bigger (in this case 20 period) Channel and use the smaller one for trailing the SL…
of course, there can be many more ways to use the Donchian Channel (different time frames, periods, etc.)…and that’s the reason of this thread…to discuss all these possible setups…
i hope we can get an informative and productive discussion going…
Very simple, very elegant, very proven, used by some of the biggest and best hedge funds of all time, Donchian Channels must be the most underrated tool available to traders.
normally the Donchian Channels are used on daily charts…lately i am testing with 4h TF…but i am curious if anybody uses the DCs on smaller TFs (1h, 15min, 5m,…)?
I tried that for a week just for kicks once. I used a 15m chart. I actually profited every day (probably luck). Too much work, but it could be automated. I think the risk adjusted returns are not pretty compared to longer term trend following.
I figured I would maybe keep up with a real time trade using Donchian Channels in this thread to perhaps get things rolling a little. The sad reality is it could take a long time to get a good one going. Ha! Such is trend following.
So here is the system for this trade:
Enter on the break of a four week Donchian Channel in the direction away from a two hundred day moving average, exit on the break of a four week Donchian Channel in the direction toward the two hundred day moving average.
I took an AUD/JPY short trade at 91.220 because AUD/JPY broke out of the four week Donchian Channel to the downside away from the two hundred day moving average. I will exit this trade on the next break of the four week Donchian Channel to the upside toward the two hundred day moving average.
My initial stop distance is 349.3 pips from my entry at 94.713. I got in a little late so my entry is almost 50 pips below the break of the channel but it is better to get in late than never. My stop will not move until the four week high drops so it will sit where it is for a few weeks at least. I am risking about 1.45% of my closed account balance on this trade. Chances are it will be a loser, but that is Donchian Channel trend following.
do you enter trades with market order?
i usually set pending orders at the donchian lines and move them with the lines until they get triggered…so you don’t get in late and miss part of the move…
Ha! I knew I was opening a can of worms posting this particular trade. Shix. But it was one I entered yesterday and I wanted it to be real time so I went with it.
[B]I use all stop orders for everything all the time.[/B] But… I trade four, ten, twenty, and fifty two week channels on twenty different pairs. So that is kind of like trading eighty systems. In order to be able to do that, I have built a risk budget (my risk budget was my main project in development over the last year). Sometimes I will not have the budget to take a trade (my budget would have me take less than the minimum lot size). So I will not enter that trend on the four week but wait for the budget to open up and trade on the ten week channel.
I traded this pair on the four week channel back in January and got out with the new four week high on March 2nd with 179 pips in profit. (You can see that the channel would have indicated that trade in my image above). When I got out, I had the budget to go right back in and I set my stop order to do so accordingly. But as the weeks passed, my budget changed and I thought I was going to end up not trading the next break below the four week channel in this pair. Rather, I thought I might end up having to wait for the ten week channel to break (which is at the same level that will break the 20 and 52 week channels at this time by the way).
So I just left my order sitting where I had left it back on March 2nd (I really probably should have gone ahead and moved it down to the 10, 20, and 52). On the 31st, the four week channel was broken and my budget was a bit shy. But I knew I was close to having the budget so I just let things sit still. Then, yesterday my budget opened up enough but before I could move my order up AUD/JPY came down and ran through my stop getting me in anyway.
This is a pretty unusual situation and if I get my account size higher it will go away as the granularity of the account increases (the ratio of the account size to the smallest lot size available to trade).
Do you use the four channels for every pair?
One could choose the period of the channel depending on the pairs volatility, for example…
Up to now, i use two channels on the chart…the classic 20-10 combination…the 20 DC for entries and the 10 for the trailing stop…
but i also test 10-5 and 7-14 combinations…i only tried on 4h and 6h charts…but i want to try lower TFs also…so, it will be interesting to find a good combination for these TFs…
Multi channel charts (more than two at once) could also be interesting…you will get more trades…
I look at the 10 day, 4 week, 10 week, 20 week, and 52 week for every pair. But the main two I trade are the 4 week and 10 week. And yes, the frequency with which a channel is broken is how I measure noise and I look to stay just outside the noise.
What platforms offer Donchian Channels? Which do not?
-Adrian
Forex.com FOREXTrader = YES
FXCM Trading Station = YES - must be installed additionally, great features
FXCM Mobile Trading Station = YES
FXCM Webtrader = YES
Oanda fxTrade = No
MT4 = YES - must be installed additionally
Thinkorswim = YES
FXCC = MT4
FxPro cTrader = YES
FxPro MT4
FXTM = something called CHANNELS, looks like DCs, but dependant on TF and not changeable by the user
FxChoice = MT4/MT5
I’d like to build a list. If you use a platform not listed, let us know.
for everybody interested in trend following, there are some interesting podcasts of Michael Covel on youtube called ‘Michael Covel on the Trend Following Radio’.
Those are also available on iTunes and TuneIn. Really good stuff. For some super in-depth convos with hedge fund managers, especially those that are trend followers, check out Top Traders Unplugged | Conversations with the World’s Top CTAs, Trendfollowers & Hedge Fund Managers. Scot Billington and Jerry Parker have some really good interviews there. The host, Niels Kaastrup Larsen, used to work for Jerry Parker and still does work for Bill Dunn.
FXCC = MT4
FxPro cTrader = YES
FxPro MT4
FXTM = something called CHANNELS, looks like DCs, but dependant on TF and not changeable by the user
FxChoice = MT4/MT5
i just put all available currency pairs on the quote list of Oanda’s fxTrade and realized that it’s 73 pairs!!!
what do you think of trading all of them?
quite a sick idea, but on the other hand…we just follow trends, so why not?
what would be a correct risk management to be able to do so? and would you want to be in all pairs at any time?
until now, i put my pending orders at the DCs of the bigger DC (normally 20) and trail SL on the smaller DC (normally 10)…and so i had always at least pending orders of all pairs i trade…
i remember you were using an additional filter to avoid being in every possible trade, no?
but wouldn’t you want to be in every possible trade to catch every possible trend?
If you can, trade 'em all. But be mindful of exotics with high rollover costs. Example: USD/CNH. I only take shorts in that one because the rollover on the long side makes the long trades not worth taking.
The point of trend following is to never miss a trade. The difference is that you may use a moving average or larger channel or something to choose direction. That way you will get into every major trend, you may just get in later and have less whipsaws.
yeah, you have to keep the rollover costs in mind…i’ll have a closer look and decide then which pairs are interesting…don’t have to be the whole 73 pairs…
Yeah and I try to select pairs to diversify a bit. I don’t want every pair to include the $. I did a lot of work in a spreadsheet back in January to try to find the most currency diversification I can. But shortly thereafter, many dealers began cutting many of those exotics because they have floors or bands or whatever. I personally figure every currency is in some sort of band or has a floor or something whether that is stated by the central bank or not. When the euro reaches extremes the ECB will be sure to get involved, same goes for the FED and everyone else.
I missed that USD/RUB trend last year. I think with Oanda offering odd lots in exotics, trend followers can get at least some exposure to those trends in those diversifying pairs.
for the moment i stay with the 28 pairs of the combination of the 8 major currencies, plus Brent Crude Oil, West Texas Oil, Copper, Natural Gas, Silver, Corn, Soybeans, Sugar and Wheat…let’s see how it works out…
