Trending markets tend to have some of the most obvious trading opportunities that traders can easily capitalize on. Because of this, trend following traders tend to enjoy having relatively high win ratios as it is quite easy for them to identify high probability trade setups.
Aside from that, if done right, traders can easily trade trend following strategies that can produce very high yields compared to the risk placed on the trade. This means that it is also possible to not only have a high win rate strategy, but also have that same strategy as a high risk-reward ratio type of strategy. This done by trading the short-term trends formed after retracements which are in confluence with the direction of the main trend.
So, trend following strategies are great. However, even with its ease, some traders still find it difficult to consistently profit from the forex market. This is because trend following strategies do not work when the market is not trending, and many traders fall into the trap of trading a strategy blindly even when the market does not call for that type of strategy. The first skill traders should develop is differentiating trending and non-trending markets.
One classic description of a trending market is based on the pattern of its price swings. An uptrend market is one which constantly breaks above its swing highs and never drops below its swing lows. A downtrend market on the other hand constantly drops below its swing lows and never breaches above its swing highs.
Skilled price action traders can easily identify this. However, new traders might find it difficult to objectively identify such type of market. Luckily, there are technical indicators that can be used to help us objectively identify such type of markets.
Let us look into how we can identify trends based on this concept using the Donchian Channel.
Table of Contents
The Donchian Channel is a technical indicator developed by Richard Donchian. It is a momentum-indicator which is based on the highs and lows of price.
The Donchian Channel is composed of three lines. First the outer lines. The upper line is based on the highest high of price within the predetermined number of periods. The lower line is based on the lowest low of price within the same predetermined periods. The middle line on the other hand is basically the midpoint of the upper and lower lines.
In this version of the Donchian Channel, the color of the lines change depending on the direction of its slope. The lines are blue whenever they are moving higher, and red whenever they are moving lower. The color of the lines also changes independently from each other.
Given the nature of this indicator, it can be used to identify trending markets as trends are typically based on the swing highs and swing lows.
In an uptrend market, all the lines would be blue as price action is constantly making higher highs and never drops below a swing low. On the other hand, the lines are all red in a downtrend since price is constantly making lower lows and never breaches a swing high.
Price action also tends to stay above the middle line most of the time during an uptrend as it tries to constantly push above the swing high. It also tends to stay below the middle line during a downtrend as it also constantly drops below the swing low.
The Awesome Oscillator (AO) is a momentum-based trend following indicator developed by the legendary trader, Bill Williams. It is an oscillator type of technical indicator based on the concept of moving average crossovers.
The Awesome Oscillator computes for the difference between a 5-bar Simple Moving Average (SMA) and a 34-bar Simple Moving Average (SMA). These SMA lines are computed based on the median of price instead of the usual close of each bar which most moving average lines use. The result is then plotted as histogram bars. Positive bars indicate a bullish trend, while negative bars indicate a negative trend. The color of the lines also indicates the momentum of the trend. Positive green bars indicate a strengthening bullish trend, while positive red bars indicate a weakening bullish trend. Negative red bars indicate a strengthening bearish trend, while negative green bars indicate a weakening bearish trend.
Given the concept of this indicator. We could say that it is somehow similar to a moving average crossover. As such, it is also an excellent trend indicator.
We will use this indicator as a trend direction filter. We will confirm the direction of the trend based on whether the bars are constantly positive or negative.
Bullish Donchian Channel Retracement Setup – Buy
- The Donchian Channel lines should be blue.
- The Donchian Channel lines should be above the 100 SMA line.
- Price action should generally be above the middle line of the Donchian Channel.
- The Awesome Oscillator bars should be positive.
- Price should retrace below the middle line of the Donchian Channel and cause the 7-bar Exponential Moving Average line to drop below the middle line.
- Enter a buy order as soon as the 7 EMA line crosses back above the middle line of the Donchian Channel.
- Set the stop loss on the support below the entry candle.
- Trail the stop loss below the middle line of the Donchian Channel until stopped out in profit.
Bearish Donchian Channel Retracement Setup – Sell
- The Donchian Channel lines should be red.
- The Donchian Channel lines should be below the 100 SMA line.
- Price action should generally be below the middle line of the Donchian Channel.
- The Awesome Oscillator bars should be negative.
- Price should retrace above the middle line of the Donchian Channel and cause the 7-bar Exponential Moving Average line to breach above the middle line.
- Enter a sekk order as soon as the 7 EMA line crosses back below the middle line of the Donchian Channel.
- Set the stop loss on the resistance above the entry candle.
- Trail the stop loss above the middle line of the Donchian Channel until stopped out in profit.
The Donchian Channel is an excellent trend indicator. Given the nature of the Donchian Channel, it somehow correlates with the description of trend based on price action. It also tells us whether a trend is strong or not based on how price action interacts with its middle line.
This strategy gives us a structure on how we could use this excellent tool to trade a trend following strategy.
Forex Trading Strategies Installation Instructions
Donchian Channel Deep Trend Retracement Forex Trading Strategy – MT5 is a combination of Metatrader 5 (MT5) indicator(s) and template.
The essence of this forex strategy is to transform the accumulated history data and trading signals.
Donchian Channel Deep Trend Retracement Forex Trading Strategy – MT5 provides an opportunity to detect various peculiarities and patterns in price dynamics which are invisible to the naked eye.
Based on this information, traders can assume further price movement and adjust this strategy accordingly.
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How to install Donchian Channel Deep Trend Retracement Forex Trading Strategy – MT5?
- Download Donchian Channel Deep Trend Retracement Forex Trading Strategy – MT5.zip
- *Copy mq5 and ex5 files to your Metatrader Directory / experts / indicators /
- Copy tpl file (Template) to your Metatrader Directory / templates /
- Start or restart your Metatrader Client
- Select Chart and Timeframe where you want to test your forex strategy
- Right click on your trading chart and hover on “Template”
- Move right to select Donchian Channel Deep Trend Retracement Forex Trading Strategy – MT5
- You will see Donchian Channel Deep Trend Retracement Forex Trading Strategy – MT5 is available on your Chart
*Note: Not all forex strategies come with mq5/ex5 files. Some templates are already integrated with the MT5 Indicators from the MetaTrader Platform.
Click here below to download: