Smart Donchian Channel Hariss 369

1. The Donchian Channel is a trend-following indicator. It’s primarily used to identify volatility, breakouts, and price trends.

The channel is composed of three lines:

Upper Band: The highest high over a specified period (e.g., 20 bars).
Lower Band: The lowest low over the same period.
Middle Line (optional): The average of the upper and lower bands.

2. How the Donchian Channel Detects Price Momentum

The Donchian Channel is based on price extremes, which inherently reflects momentum and market sentiments.

Price Above Midline / Upper Band: Indicates strong bullish momentum. Buyers are dominating, pushing price toward new highs.

Price Below Midline / Lower Band: Indicates strong bearish momentum. Sellers are in control, pushing price toward new lows.

Price Touching the Bands:

Upper band breakout: A potential continuation of an uptrend or trend initiation.
Lower band breakout: A potential continuation of a downtrend or trend initiation.
Bounce from the bands: Signals potential reversals or retracements.

Essentially, the Donchian Channel acts as a dynamic support and resistance level.

3. Interpreting Market Conditions

Trending Markets:
Price moves along or breaks out from the upper/lower band. Donchian Channel expands as volatility increases. Breakouts from the channel often indicate continuation of the trend.

Sideways/Range-Bound Markets:
Price oscillates between upper and lower bands. Channel width narrows. Bounces from upper/lower bands may produce false signals unless filtered by volume or trend indicators.

4. Trading Applications

Breakout Strategy:

Buy when price closes above the upper band.
Sell when price closes below the lower band.

Useful for trend-following systems.
Reversal/Bounce Strategy:
Buy when price bounces from the lower band.
Sell when price rejects the upper band.

How this indicator has been designed to reduce false signals:
Buy signal fires when price bounces from the lower band with high volume (1.5), bullish RSI and DMI/ADX.

Sell signal fires when price reverses from upper band with high volume (1.5) with bearish RSI and DMI/ADX.

One can change the RSI and RVOL setting according to trading style and class assets being traded.

Trading With this Indicator:

Buy when the signal is fired to buy, place Stop Loss just below the low of last candle and take profit @1.5 or 2 times of stop loss.

Sell when the signal is fired to sell, place stop loss just above the high of the last candle and take profit @1.5 or 2 times of stop loss.

It is to note that, this indicator is a trend following indicator, so be with the trend will avoid missing out trend following levels or early exit.