Share this: Ed Seykota is a legend in the trading world. He was very successful and continued to trade into his 90s. While he operated primarily in the field of commodities, his technical analysis is applicable to any market. People tend to think complicated is better, but the 4 week rule is a straight forward way of getting you on the right side of a profitable trend. Apart from the 4 week rule, Donchian did work with a five and twenty day moving average crossover signal system, and devised buy and sell rules using a weekly time period.
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Compare the low print for each minute, hour, day, week or month over that period. Choose the lowest print. Compare high and low prints for each minute, hour, day, week or month over that period. Subtract the highest high print from lowest low print and divide by 2. Plot the result. Donchian Channels identify comparative relationships between current price and trading ranges over predetermined periods.
Three values build a visual map of price over time, similar to Bollinger Bands, indicating the extent of bullishness and bearishness for the chosen period. The top line identifies the extent of bullish energy, highlighting the highest price achieved for the period through the bull-bear conflict.
The center line identifies the median or mean reversion price for the period, highlighting the middle ground achieved for the period through the bull-bear conflict. The bottom line identifies the extent of bearish energy, highlighting the lowest price achieved for the period through the bull-bear conflict. In this example, the Donchian Channel is the shaded area bounded by the upper green line and the lower red line, both of which use 20 days as the band construction N periods.
When price decreases for 20 days from a high, the green line will be horizontal and then start dropping. Conversely, when price rises from a low for 20 days, the red line will be horizontal for 20 days and then start rising. This results in a more balanced calculation that reduces the impact of big high or low prints. Limitations of Using Donchian Channels Markets move according to many cycles of activity. An arbitrary or commonly used N period value for Donchian Channels may not reflect current market conditions, generating false signals that can undermine trading and investment performance.
Donchian Trading Strategy – Crawling Along Pattern
Well, in comes the market to disrupt this very linear path to work life. Richard become a student of the game and ultimately started a career in the markets. Ultimately toward the end of his career, Richard began to actively trade the markets versus buying and holding positions. Remember, active trading in the 50s and 60s is nothing like today. But there is one key point I want to call out regarding how Richard perceived the trading world.
3 Simple Donchian Channel Trading Strategies
His original trend following ideas form the basis for all trend following success that has followed, including Richard Dennis. Donchian and Armenouhi A. A degree in economics. Although he appreciated studying about and collecting oriental rugs, he became more interested in the financial markets after reading the book about Jesse Livermore, Reminiscences of a Stock Operator.