The Magic Formula For The Donchian System That Will Make You Millions

Richard Donchian was an Armenian-American commodities and futures trader, that is credited with developing the widely accepted Donchian Channel Indicator. Richard Donchian is recognized as the father of trend following.

The Donchian Channel is created by taking the greatest high of x number of days, and the lowest low of the same x number of days, then marking the region between those values on your stock chart.

The Donchian channel is a useful indicator for seeing the volatility of a market price. When a price is steady the Donchian channel will be fairly narrow. In case the price changes a lot the Donchian channel will be much wider. Its principal use, having said that, is designed for giving signals for buy and sell trades. If a stock trades above its highest x day high, then a long trade is made. If it trades below its lowest x day low, then a short position is entered into. They're handy for predicting support and resistance price levels from an objective point of view.

How It Is Implemented

The Donchian Bands mostly are used as a breakout indicator, it defines resistance and support levels and generate entries as price breaks these levels. As lows and highs normally correlate with support and resistance levels, this indicator is advantageous in objectively identifying these areas.

Even so, it is also used as a reversal signal - entering when price touches a band and reverses its direction. Before using the indicator in this manner, confirm the validity of the psychological level by demanding at least 2 touches at the level. This makes sure that the signal is good and enhances its dependability.

Yet another way of trading the Donchian Band is employing its middle band. The middle band is the average of the upper and lower band, and can also be used to measure trend. Entry signals are generated in the following way: When price crosses the middle band from below - buy, and when price crosses from above - sell. It's really a effective signal when trend strength is confirmed (with support and resistance or other indicators).

Buying Using Donchian Bands

There are various methods for deciphering and trading the Donchian Bands. Probably the most commonly used is definitely the breakout:
1. Long Trades - Long trades are entered when price breaks above the 20-period upper Donchian Band. Conservative traders wait for price to close above the Donchian upper band to get into the position.
2. Short Trades - Short trades are entered when price breaks below the 20-period lower Donchian Band. Conservative traders wait for price to close below the Donchian lower band to get into the position.

Another technique of using Donchian Bands is employing the middle band as the buy or sell signal line. Entry signals are produced in the following way: When price crosses the middle band from below - buy, and when price crosses from above - sell.

Donchian's 20 Trading Guides

Richard Donchian started out his Wall Street livelihood in 1930. Donchian started off writing a technical market letter in 1933, and persisted for quite a while. In 1934, Donchian put together the subsequent 20 trading rules that are based in human psychology. Human psychology never changes thus these rules continue to be applicable today.

1. Be careful of acting instantly on a common public opinion. Even if correct, it will usually delay the move.

2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.

3. Limit losses and ride profits, regardless of all other rules.

4. Light commitments are a good idea when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing.

5. Almost never take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.

6. Prudent use of stop orders is a valuable aid to profitable trading. Stops can often protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are inclined to be more valuable and less dangerous if used in proper relation to the chart formation.

7. In a market in which upswings are likely to equal or exceed down swings, heavier position really should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%

8. In taking a position, price orders are allowable. In closing a position, use market orders.

9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules.

10. Moves in which rails lead or participate strongly are frequently more worth following than moves in which rails lag.

11. An analysis of the capitalization of a company, the degree of activity of an issue, and whether an issue is a fatigued truck horse or a spirited race horse is fully as important as a study of statistical reports.

12. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Usually, when the second move from the sideways range has run its course, a counter move approaching the sideways range can be expected.

13. Reversal or resistance to a move will probably be encountered:
A. On hitting levels at which up to now, the commodity has fluctuated for a considerable length of time within a narrow range
B. On nearing highs or lows

14. Watch for great buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too often.

15. Watch out for crawling along or repeated bumping of minor or major trend lines and prepare to see such trend lines broken.

16. Breaking of minor trend lines counter to the major trend gives critical position taking signals. Positions can be taken or reversed at such places.

17. Triangles of ether slope may mean either accumulation or distribution contingent on other considerations although triangles are frequently broken on the flat side.

18. Watch out for volume climax, specially after a long move.

19. Do not rely on gaps being closed until you can separate breakaway gaps, normal gaps and exhaustion gaps.

20. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, in particular when volume declines on the reversal.

For additional instructive trading tutorials try these three fantastic resources:
The Magic Formula For Donchian Channels That Can Make You Rich
Trading Trolls
Great Penny Stocks For Dummies and Suckers Satire