✔️ Information reviewed and updated in November 2023 by Eduardo López
In order to be a good cryptocurrency operator you have to know even the smallest detail about all the tools that exist to be able to support you in your strategies. Indicators in trading such as the Donchian channel show us if the price is in a certain trend, if they are overbought, oversold, or if they diverge from the price.
There are two types of indicators, oscillators and trend indicators. Each has different functions, but both are easy to use. In addition, they are very helpful to make a more complete analysis.
Here's more about the Donchian Channel Indicator. An indicator that can now be found on most trading platforms and chart analysis packages.
➡Definition of the Donchian channel indicator
The Donchian channel is a technical indicator used to analyze price action and market operations. It was developed by Richard Donchian, in the mid-XNUMXth century to help you identify trends.
This indicator helps to more easily identify the volatility that exists in the market: if the channel is small then the volatility is low, and if the channel is large then the volatility is high.
It is formed by three lines created by calculations of moving averages, which They comprise an indicator formed by an upper and a lower band around a mid- or mid-range band.
➡What is the Donchian channel for?
As we already mentioned, The Donchian channel is used to analyze the volatility of the prices of a certain asset. If the price is considered stable, then the channel becomes relatively narrow. On the contrary, if the price goes down a lot, the channel becomes wider.
However, the main use of this indicator is to provide signals for the opening of buy and sell positions. If an asset is traded above its maximum of n periods, then it seeks to find the opening of a buy position. On the other hand, if the asset is traded below its minimum of n periods, then it seeks to find the opening of a sell position.
Currently, with trading platforms you can use any value for the period. The operator is the one who chooses if he wishes for days, hours, minutes, or others.
➡How do you get the Donchian channel?
The calculation for the Donchian channel is done as follows:
- The upper line of the channel is the highest maximum in the last n periods
- The midline of the channel is the difference between the highest maximum in the last n periods and the lowest minimum in the last n periods, divided by 2
- The bottom line of the channel is the lowest low in the last n periods
➡What is your interpretation?
The three values that are calculated in this indicator make a price map over time, where they indicate the degree of bullish or bearish strength of the market.
The existence of a bullish signal is determined when the closing price is above the upper line of the channel, and a bearish signal when the price closes below the lower band of the channel.