Richard Donchian is called the grandfather of trend following. His initial trend following ideas form the basis for all trend following achievement which has followed. Donchian's initial systems required using a moving average for the entry and exit indicator part of his program.Video and description are from http://www.youtube.com/user/StockTradingMaster
Richard Donchian made use of the 4 week rule. Donchian's tactic was to buy whenever a stock hit a 4 week fresh high and the exit rule was sell when it forms a two week low.
The Donchian channel is an indicator found in market trading made by Richard Donchian. It is produced by taking the highest high of the daily maxima and the lowest low of the daily minima for the last n days, then observing the area between those values on a chart.
The Donchian channel is a useful indicator for seeing the volatility of a market price. Where a price is stable the Donchian channel is going to be relatively narrow. In the event the price fluctuates a great deal the Donchian channel is going to be wider. Its principal use, however, is made for offering alerts for long and short positions. In cases where a market trades above its highest n day high, then a long is established. In case it trades below its lowest n day low, then a short is established.
The Donchian Bands are determined in basic formulas:
Upper Band = Highest High of X periods
Lower Band = Lowest Low of X periods
X is the calculation period of the Donchian Bands.
The Donchian Bands are mainly used as a breakout indicator - they determine support and resistance and make entries as price breaks these levels. Because Lows and Highs usually correlate with Support and Resistance levels, this indicator is valuable in objectively defining Support and Resistance levels.
Nevertheless, it is also used as a reversal signal - entering when price touches a band and reverses its direction. Before using the indicator in this fashion, verify the quality of the psychological level by requiring no less than 2 touches at the level. This makes certain that the signal is good and elevates its dependability.
My preferred way of trading the Donchian Band is using its middle band. The center band is the average of the lower and upper band, and may also be used to evaluate trend. Entry signals are made in the following way: When price crosses the middle band from below - buy, and when price crosses from above - sell. It is usually a powerful signal when trend strength is confirmed (with support and resistance or combined with additional technical analysis tools).
As a trader you need every tool out there, that is every tool you feel comfortable with. It's a mistake to use a tool because every one else uses it. Use what your comfortable with, but how do you know what your comfortable with if you don't try all the tools out? You don't, so from time to time I'll post "good" videos I find explaining the tools of the stock trade.
In the mean time, Do some home work, make some money.
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