The Donchian Channel is not among the most popular indicators in trading, but it has been gaining popularity recently due to its versatility and ease of use. This indicator is certainly one of the most suitable for beginners and is one of the easiest to understand. Check out our full explanation.
One of the main indicators of technical analysis, the Donchian Channel, is capable of showing the history of volatility, pointing out possible breakouts, reversals, as well as being able to indicate overbought and oversold.
And it’s nothing new; it’s an indicator that’s more than half a century old, having been developed in the 1950s, as we’ll see below.
What’s more, it’s not a very popular indicator in Brazil, where few traders use it and explain how it works, as well as its best applications.
So, come with us to understand definitively how the Donchian Channel works and how you can make money using it on investment platforms such as IQ Option.
What is the Donchian Channel?
Created in the 1950s by the “father of trend trading”, Richard Donchian, he developed this tool with the aim of measuring volatility in the American futures markets.
The Donchian Channel is very similar to Bollinger Bands in that it consists of 3 lines that create a channel (where the middle line represents the average), as the name suggests. And for binary options markets, such as IQ Option, it is important because it is also effective for short-term markets.
Volatility
As we mentioned above, it is effective for measuring market volatility, because when the bands get narrower, it indicates a greater tendency to sideways movement. When they get wider, it indicates greater volatility.
Overbought and Oversold
It’s also a great overbought and oversold indicator and identifying this is easy with the Donchian Channel in IQ Option. When the price candle touches the upper band, it indicates overbought and when the opposite occurs, it indicates oversold.
Why use Donchian Channels on IQ Option?
The degree of accuracy and ease of reading the Donchian Channel on IQ Option are the main reasons why we recommend it. What’s more, the fact that it is useful for more than one purpose makes trading much easier and avoids polluting the chart too much with various indicators.
Even so, even though it’s a more complete indicator, we recommend that you don’t use and make your trades based on just one of them. The Donchian Channel on IQ Option is very well complemented by trend lines, the Relative Strength Index (RSI), the Average Directional Index (ADX), among others.
That said, we will help you with some strategies for better application of the Donchian Channel on IQ Option.
Strategies for operating the Donchian Channel
Understanding how an indicator works is important, but understanding the strategies for applying them is even more important.
Midline crosses
The Donchian Channel has 3 lines: the 2 edges at each end and the central one, which indicates the average. If the price fails to break through one of the edges and starts to move in the opposite direction, crossing the central line, this could be a good indication of a reversal, with a good chance of being a winning trade if you enter.
To make this strategy even more assertive, you can combine the Donchian channel on IQ Option with the MACD. If this second indicator also provides an entry reading, you’ll be able to increase your hit rate on the put or call trade.
End lines
Price movements at the ends of the Donchian Channel are also good opportunities for profitable trades. If the price reaches either end of the channel, but doesn’t break through it, it’s very likely that the price will move in the opposite direction.
In other words, if the price touches the upper edge of the Donchian Channel without breaking it, this opens up a good opportunity for a put trade. On the other hand, if the price touches the support without breaking through it, it could be a good opportunity for a call. In both cases, the price is likely to move towards the center line.
You can be even more assertive with this strategy if you combine it with other indicators, such as the Relative Strength Index (RSI), which will give you a more accurate reading of whether the market is overbought or oversold.
Advantages and Disadvantages of the Donchian Channel on IQ Option
It’s important to emphasize that there is no perfect, infallible indicator in trading. They all have their strengths and weaknesses and it’s very important to understand this before designing your trading strategy.
In this article, we have already mentioned most of the advantages of using the Donchian Channel on IQ Option, but we cannot emphasize these aspects enough.
Advantages
One of the main advantages of the Donchian Channel (which we haven’t mentioned yet) is that it’s easy for beginners to understand and use. If you’re just starting out in trading, it’s an excellent choice because it also provides readings for more than one aspect, works for all timeframes and also for all assets.
Markets without a defined trend are often difficult to trade and bring down many traders who venture into them. This indicator works in these sideways markets and also offers good opportunities when they are highly volatile.
Disadvantages
Like any other indicator, it’s not recommended to use it on its own, as this increases the possibility of reading false signals, as in the case of breakouts.
It also uses historical data to generate its lines, which in some cases of sudden changes may not be so accurate.
How to use the Donchian Channel in IQ Option
Finally, we come to the practical part. It’s very difficult to point out that one indicator can be good, bad or better than another. In our opinion, if used in the right way, any consolidated indicator can be useful and help you to have a better winning rate on IQ Option.
As we mentioned above, the Donchian Channel on IQ Option is an excellent choice for beginners and we recommend at least trying it out.
To apply the Donchian Channel on IQ Option, select the “Volatility” tab and click on “Indicators”. Then simply select the “Donchian Channel” option.
This indicator is so practical that even the adjustments are simple. Apart from being able to change the color of the lines, the only adjustable field is the period. The original setting is 20 periods, but you can adjust as you go along.
After reading this article, you can learn how to use the Donchian Channel with a demo account on the IQ Option platform, and get to know the most interesting trading strategies.
