Donchian Trend Forex Trading Strategy

August 25, 2020

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Trend Following trades is about one thing – catching those big trending waves. These are those trades that could change a traders account in an instant. These are those trades that could double a trading account after several trades with such profits. These are those trades that could earn 10 times the risk placed on a trade. These are the kinds of trades that traders dream of. However, it is quite difficult to catch.

Donchian Trend Forex Trading Strategy is one of those trading strategies that could allow traders to catch these kinds of trades from time to time. It does not happen everyday but it could happen using this strategy.

Donchian Channel

The Donchian Channel is an indicator developed by Richard Donchian. This indicator draws a line above and below a midline, much like the Bollinger Bands. However, there similarities end there.

The Donchian Channel is a simple indicator which observes for the highest high and the lowest low within a set period. It then marks the highest high as the upper line and the lowest low as the lower line. This allows traders to assess what price is considered extreme within a period. The midline is simply the average of the highest high and the lowest low or the median of the range for a certain period.

This indicator is a very simple yet very powerful indicator as it allows traders to effectively identify extremes as well as the mid-price of a range.

Double CCI Woodies

The Double CCI Woodies indicator is based on the Commodity Channel Index (CCI). The CCI indicator compares a Simple Moving Average (SMA) with the Typical Price. The resulting computation is then plotted as an oscillating indicator on a separate window. This allows traders to observe for long-term trend changes. However, this could also be modified to observe for short-term trends.

The Double CCI Woodies makes use of two CCI computations and plots it on one chart. This could then be used as entry signals using crossovers of the two lines or as an indicator to observe for a shorter-term trend.

Trading Strategy

This trading strategy is a crossover strategy using the Donchian Channel and a Simple Moving Average (SMA).

We will be using a 30-period SMA as our main signal line, while the midline of the Donchian Channel will be our faster moving trigger line. Trades will be taken whenever the midline of the Donchian Channel crosses over the 30 SMA.

We will also be using the Double CCI Woodies indicator as our confirmation or as a complimentary indicator. Trades signals should be filtered using the histogram bars of the Double CCI Woodies indicator. This should confirm if the trend reversal signal is valid.

Indicators:

30 SMA (Gold)
DonchianChannels
- Bars to Count: 10
DoubleCCI_Woodies
- Trend CCI Period: 28

Timeframe: 1-hour, 4-hour and daily charts

Currency Pairs: major and minor pairs

Trading Session: Tokyo, London and New York sessions

Buy Trade Setup

Entry

The Trend CCI Woodies indicator should be printing positive green histograms indicating a bullish trend
The blue line of the Donchian Channel indicator should be crossing above the 30 SMA indicating a bullish trend reversal
Enter a buy order on the confluence of these conditions

Stop Loss

Set the stop loss below the 30 SMA

Exit

Close the trade as soon as the blue line of the CCI Woodies indicator crosses below zero

Sell Trade Setup

Entry

The Trend CCI Woodies indicator should be printing negative red histograms indicating a bearish trend
The blue line of the Donchian Channel indicator should be crossing below the 30 SMA indicating a bearish trend reversal
Enter a sell order on the confluence of these conditions

Stop Loss

Set the stop loss above the 30 SMA

Exit

Close the trade as soon as the blue line of the CCI Woodies indicator crosses above zero

Conclusion

The Donchian Trend Forex Trading Strategy is a high yield trading strategy. The longer-term perspective of the indicators being used allows traders to catch trades that could trend for quite a long time. This allows traders to catch trades that could result to a reward-risk ratio of 8:1 or even 10:1.

However, these high yielding trades don’t occur every day. There will be trade setups in which the trend is short-lived. For this reason, it would be wise to also trail the stop loss wisely in order to protect profits. Trade management is an important key with this strategy as we are trying to ride the trend from start to finish. We would want to avoid being stopped out prematurely, however we would also not want to be caught at a loss when the market reverses too soon.

Catching long-trending waves is quite difficult due to the unpredictability of the market. It would be best to use this trading strategy in a currency pair or a market condition which does not tend to be too choppy often.