The Donchain Channel is an indicator that is used by traders to always have the reference of the maximum and minimum levels reached by the price in the most recent periods. This is an indicator based on three lines that always remain in the same order.
The highest one indicates the maximum price reached by an asset in the last n periods, where n is an arbitrary number chosen by the trader according to his strategy. The lowest line indicates the lowest price in the same period, while the middle line is simply the arithmetic average between the other two.
The first thing a trader has to do to use the Donchain channel is to select a reference period. Normally it is chosen according to the trend you are studying: for a long trend you use a higher number of periods and vice versa. This decision is already very important, because it strongly influences the position of the three lines on the chart.
Once the reference period is selected, the platform processes the calculations to draw the three lines.
The ideal is that the calculation takes place on the maximum and minimum of the individual candles, not on their opening and closing prices; today some platforms also allow you to manually select this setting. If you can also use the data of the current candle, better not to do it to remain more adherent to the traditional version of the tool.
At this point we study the position of the three lines giving a first interpretation to the current situation:
If the three lines are very close to each other, it means that the market volatility in the selected period has been low;
· If, on the contrary, there is a significant gap between the three lines, it means that the volatility is high or increasing. This is also one of the signs of the possible formation of a trend;
With the appropriate exceptions, Donchain’s strategy considers that when volatility is low it is not the right time to enter the market.
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