Donchian Channel Daily Trading System

Donchian Channel Daily Trading System is a trend following strategy.

The time frames used:

In this trading system we will be using a classic system that many successful traders use.

It involves using the daily chart and the 4 hour chart only.

The daily chart is used to determine the trend and direction and the 4 hour chart is used to time the entry.

The indicators used:

This strategy mainly revolves around the Donchian channel indicator.

The Donchian channels are added both to the daily chart and the 4 hour chart.

The setting for the Donchian channel daily chart is 20 and the Donchian channel setting for the 4 hour chart is 55 which is a

typical Fibonacci number

We will also be using the typical 200 day moving average (set at the close) for the daily chart. This will help visually determine

the trend and the strength based on the angle of the moving average and distance of price from it.

The last indicator used in this strategy is the Stochastics on both daily and four hour charts set at 14, 3, 3.

Step one:

Always trade in the direction of the trend! (price above the 200 day moving average on the daily chart, then only trade up and

vice versa)

The decision is up to you to determine the strongest trending currency pair. You will notice the angle of the moving average and

the distance of price in relation to the moving average. It is still possible to trade a pair that is not trending as strong but it is

preferred to use the strongest trending pair.

In this manual we have a perfect example of a pair (GBP/USD) that is still in an uptrend according to the position of price in

relation to the moving average. (please see chart below)

The set up:

In this example we will assume that we are looking for a trade in a up trend and a long position.

We will also need to use the A, B, C, price swing method, (not to be confused with Elliott Wave)

We will be looking on the daily chart for price to remain above the 200 day ma but touching the lower channel of the Donchian channel indicator. This should preferably occur at the “C” in a pull back during a trend up. (please see chart 1 below)

In chart 1 above, we start looking for an entry when we can confirm that price is above the 200 day ma and still in an uptrend.

When price returns to the lower Donchian channel, we switch to the 4 hour chart and look for the entry to go long again assuming that the trend is going to remain in tact. Once we enter the trade from the 4 hour chart, we switch back to the daily chart to manage the trade. In the next two charts below, we will see a recent (as of this writing) trading opportunity and how we use both time frames. Chart 2 Recent trading opportunity/ example. GBP/USD daily chart

In the chart above, we see that price is still above the 200 day ma and price has returned to the lower Donchian channel.

This is the first step to identifying a trading opportunity. Until price touches the upper or lower Donchian channel we don't do anything but wait or look at another currency pair for a trade.

Now we switch to the 4 hour chart and look for the entry. (please see chart 3 for 4 hour chart)

In the four hour chart above, we can see that the Stochastics has been in the “extreme” level and is returning back up. Now we use a Donchian channel indicator set at 55 and wait until price touches the upper Donchian channel at the high where the arrow is, plus one pip. This would also theoretically confirm the uptrend when price starts to break out to the upside again. As you can see this will require a large stop placement.

The exit: (take profit)

We exit the trade when price in this example, returns back to the lower Donchian channel on the four chart.

Trailing stop:

You can move the stop up (in this example) when price takes out the last high and makes a new high, then set the stop just below the last swing low.

Closing: Trading on a larger time frame like the daily and four hour charts can eliminate the pressure of intraday trading. This is only good for certain personalities. Others prefer constant activity on a hour by hour basis. No matter which trading style is right for you, you must consider the leverage required to trade any method.

Obviously we are all looking for as many trading opportunities as possible but I think we would all prefer a method that is comfortable, profitable and provides a good rate of return.