The Complete Guide to Donchian Channel Indicator

Contents
About The Author..................................................................................................................................... 3
Introduction ............................................................................................................................................... 4
What Is A Donchian Channel And How Does It Work ...................................................................... 5
Don’t Make This Mistake When Trading The Donchian Channel… .............................................. 7
Donchian Channel Breakout: How To “Catch” Every Trend In The Market — Guaranteed .... 8
How To Use The Donchian Channel To Scale In Your Winners And Reap Massive Profits... 10
1. Have Open Profits Of At Least 2R ..................................................................................................................10
2. Scale In Your Winners With Reduced Risk ..................................................................................................10
3. Determine Your Exit ..............................................................................................................................................10
Donchian Channel: How To Use It And Filter For High Probability Trades .............................. 12
Donchian Channel Strategy: How To Use It And Ride Enormous Trends ................................. 14
Average True Range And Donchian Channel Combo: How To Catch EXPLOSIVE Breakout
Trades Consistently And Profitably .................................................................................................. 16
Step 1: ................................................................................................................................................................................ 16
Step 2:................................................................................................................................................................................ 17
Conclusion ................................................................................................................................................ 19
Do You Want More Stuff Like This? ................................................................................................... 19

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 The Complete Guide to Donchian Channel Indicator

About the Author

Hi, my name is Rayner Teo.

I’m not a multi-millionaire trader, I don’t drive fancy cars, and I don’t live in a
penthouse.
But I am an independent trader, an ex-prop trader, and the founder of
TradingwithRayner.
I specialize in studying great research (from people much more qualified than me)
and applying it to the real-world of trading to find out what works and what doesn’t.
And finally, share them with traders like you so you can become a consistently
profitable trader.
Cheers,

Rayner Teo

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 The Complete Guide to Donchian Channel Indicator

Introduction
The Donchian Channel indicator is powerful.
It’s like a Moving Average — on steroids.
Once you’ve learned the secrets, you’ll hit me on the head and say…
“Why didn’t you tell me earlier!?”
Because good things come to those who wait.
So here’s what you’ll learn today:
• What is a Donchian Channel and how does it work
• A common mistake to avoid when trading the Donchian Channel
• How to use the Donchian Channel and capture every trend — guaranteed
• How to scale in your winners and reap massive profits
• How to filter for high probability trading setups
• Donchian Channel strategy: How to use it and ride enormous trends
• Average True Range and Donchian Channel combo: How to catch EXPLOSIVE
breakout trades consistently and profitably

Or if you prefer, you can watch this training video below…

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 The Complete Guide to Donchian Channel Indicator

What is a Donchian Channel and how does it work

Richard Donchian developed the Donchian Channel indicator (the pioneer of Trend
Following).
The Donchian Channel has 3 parts to it:
• Upper band – the 20-day high
• Middle band – the average of the Upper and Lower band
• Lower band – the 20-day low
Here’s how it looks like:

The Donchian Channel uses a default setting of 20-period, but you can adjust it to
your preference (like 30-day, 50-day, etc.).

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 The Complete Guide to Donchian Channel Indicator

Quick Tip:
If you use TradingView, you can find it under the “Indicators” tab.

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 The Complete Guide to Donchian Channel Indicator

Don’t make this mistake when trading

the Donchian Channel…
Here’s the thing:
Many traders make the mistake of “blindly” trading the bands.
They think if the price is at the upper band, it means the market is overbought and it’ll
reverse lower.
So, they go short.
Big mistake!
Why?
Because in an uptrend, the price will hug the upper bands for a long time.
Here’s an example:

Ouch.
So the lesson is this…
Don’t use the Donchian Channel indicator to identify overbought/oversold market
conditions.
Instead, it’s better to use it to time your entries & exits which I’ll share more in the next
section…

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 The Complete Guide to Donchian Channel Indicator

Donchian Channel Breakout: How to “catch” every

trend in the market — guaranteed
Here’s the thing:
Most traders want to ride BIG trends.
And the strategy they use is:
• Wait for a pullback
• Wait for a better price
• Wait for the market to come to them
Is there a problem with this?
YES.
Because the market might not form a pullback — and you’ll miss the entire move.
So what’s the solution?
You must trade breakouts.
Think about it:
For a market to trend, it must break out higher.
So if you trade breakouts, you’ll catch every trend.
Does it make sense?
Great!
Here’s how you can do it…
If the price “touch” the upper band of the Donchian Channel, you go long.

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 The Complete Guide to Donchian Channel Indicator

An example:

Now if you can do this consistently, you’ll catch every trend in the market —
guaranteed.

Pro Tip:
You can adjust the Donchian Channel and trade the 50-day, 100-day or even 200-
day breakout.

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 The Complete Guide to Donchian Channel Indicator

How to use the Donchian Channel to scale in your

winners and reap massive profits
So, you’ve entered a trade and market moves in your favor.
Now what?
Well, you can scale in your trades.
This means you’ll add on to your winners so you can make even more profits.
Here’s how…

1. Have open profits of at least 2R

Because if the market goes against you, you have a “buffer” to withstand the pullback.
If you have no open profits and you scale in your trade, you might lose more than
intended.

2. Scale in your winners with reduced risk

Next, you can use the Donchian Channel breakout as an entry trigger.
Now, you don’t want to risk 1R on your later trades because you could lose all your
open profits (when the market does a pullback).
Instead, scale in with 0.5R (or less), this lets you better withstand the pullback and still
earn a larger profit if the market moves in your favor.

3. Determine your exit

Lastly, you must know where to exit your positions.
Will you exit all at once or treat each position as a new trade?
In my experience, it’s easier to exit all positions when your trailing stop is hit and then
“restart” all over again.

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 The Complete Guide to Donchian Channel Indicator

Here’s an example:

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 The Complete Guide to Donchian Channel Indicator

Donchian Channel: How to use it and filter for high

probability trades
Recall:
The middle band of the Donchian Channel is the average price of the Upper and
Lower band.
This means you can use it as a trend filter to know whether you should be buying or
selling.
Here’s how:
1. Adjust the Donchian Channel to 200-period (to define the long-term trend)
2. If the price is above the middle band, you look for buying opportunities
3. If the price is below the middle band, you look for selling opportunities
Here’s an example…

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 The Complete Guide to Donchian Channel Indicator

Pro Tip:
If you trade stocks, apply the trend filter to the stock index.
For example: if you want to buy US stocks, check if the S&P 500 is above the 200-
day Moving before you go long.

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 The Complete Guide to Donchian Channel Indicator

Donchian Channel strategy: How to use it and ride

enormous trends
Here’s a fact:
To ride a massive trend in the markets, the kind that makes other traders go green
with envy, then you must…
Trail your stop loss.
This means…
No target profits.
No second guessing yourself.
No bailing out even when it feels “uncomfortable”.
You honor your trailing stop loss and get out when the signal tells you to.
Can you do it?
So, here’s how you can use the Donchian Channel to ride big trends:
• If you want to ride an uptrend, use the lower band (20-day low) to trail your
stop loss
• If you want to ride a downtrend, use the upper band (20-day high) to trail your
stop loss
Here’s an example:

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Pro Tip:
To ride shorter or longer-term trends, simply adjust the settings on the Donchian
Channel.
A higher value will ride a long-term trend and a lower value will ride the short-
term trend.

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Average True Range and Donchian Channel Combo:

How to catch EXPLOSIVE breakout trades
consistently and profitably
So how do you know when the market is about to have an EXPLOSIVE breakout —
before it occurs?

Step 1:
You use the Average True Range indicator (ATR) and identify multi-year low levels on
the ATR indicator.
Ideally, you want it to be as low (or even lower) than the previous multi-year low.
Here’s an example:

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 The Complete Guide to Donchian Channel Indicator

Step 2:
You trade the breakout of the Donchian Channel.
If the price breaks above the upper band (20-week high), you go long.
If the price breaks below the lower band (20-week low), you go short.
Here are a few examples…

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Now…
The idea behind it is the market moves from a period of low volatility to high volatility.
So the ATR indicator helps you identify periods of low volatility and the Donchian
Channel lets you trade the breakout to capture the move.
This is powerful stuff, right?

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Conclusion
So here’s what you’ve learned:
• The Donchian Channel is a Trend Following indicator
• You can long breakouts when the price breaks above the upper band
• If the price is above the middle band, have a long bias so you can trade with
the trend
• You can ride a trend by trailing your stop loss on the outer bands
• The ATR and Donchian Channel combo helps you catch explosive breakout
trades before everyone else

Do you want more stuff like this?

Then check out my website, TradingwithRayner because you’ll learn

new trading strategies and techniques to level up your trading.
There’s no hype or fluff but only the good stuff.
Here’s the link: www.tradingwithrayner.com

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