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1. Determine the highest high price of the preceding 'N' number of trading periods, not including the current session, to establish an N-day upper Donchian band. For example, the highest price of a share of a given stock over the previous 20 sessions establishes the upper 20-day Donchian band. Many investors see price breakthroughs above the upper Donchian band as a buy signal.
2. Find the lowest low price for the previous 'N' number of trading periods, not including the current session, to establish an N-day lower Donchian band. For example, the lowest price of a share of a given stock over the previous 20 sessions establishes the lower 20-day Donchian band. Many investors see price breakthroughs below the lower Donchian band as a sell signal.
3. Revise the upper or lower Donchian bands whenever the highest or lowest closing price over the past N sessions changes. An upper Donchian band will rise if the highest closing price over the past N periods rises, and a lower Donchian band will rise if the lowest closing price over the past N periods rises. As such, a Donchian channel closely follows the ranges within which a security trades over a given period, and its upper and lower limits form borders within which a security generally trades.
4. Buy securities when they trade above an upper Donchian band and sell them when they trade below a lower Donchian band. Successful traders tend to incorporate this indicator along with other pieces of analysis to provide more conviction in their approaches.