The catch is that you need to move to the left side of the chart and find the first part of the lower Donchian band where it is flat. Increasing signal accuracy, traders who use the Donchian Channel for a trend-following approach should consider adding another indicator, preferably a momentum indicator such as the stochastic, the RSI or the macd, in order to filter out low probability breakouts. As long as the trend is down, short trades can be taken near the upper band. Heres an example: Donchian Channel: How to use it and filter for high probability trades Recall: The middle band of the Donchian Channel is the average price of the Upper and Lower band. Note* Feel free to backtest different period values to find the best settings for the Donchian channel. Ideally, you want it to be as low (or even lower) than the previous multi-year low. The price should not go below the middle band during this stage. Note* the above was an example of a BUY trade using our Donchian Channel Strategy PDF. Applying the standard 20 period settings across different timeframes plots channels on your charts that do not provide meaningful information.
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Youll find that often times the Donchian channel will plot perfectly flat lines. Average True Range and Donchian Channel Combo: How to catch explosive breakout trades consistently and profitably So how do you know when the market is about to have an explosive breakout before it occurs? When the price action touches the upper Donchian channel, and it stays glued to the upper line, we create the price effect where the price looks like its crawling along the top Donchian line. Please Share this Trading Strategy Below and keep it for your own personal use! To trade intra-day breakouts, a trader would go to the 4H/1H charts and adjust the settings so that the channel encapsulates the weekly range.