Over the past few weeks I’ve shown you video examples of how you can use three powerful, yet straightforward indicators – the Donchian Channel, Williams %R, and MarketClub’s Trade Triangles – in combination to quickly find and grab some not-too-shabby profits in sideways markets.
Today I’d like to take a closer look at one of them – the Donchian Channel – and how misusing it could sink your trading portfolio.
If you’re new to trading, today’s post is a must read.
As I mentioned in the earlier oil video example, the Donchian Channel is a trend tool. To be more specific, it is a moving average indicator that plots the highest high and lowest low over the selected time intervals – which are displayed as upper and lower channel lines on your chart.
This means three very important things:
First and foremost – when the price breaks above or below the Donchian it does NOT signal a reversal. This is where someone who is new to trading and unfamiliar with Donchian Channels can easily find themselves in trouble if they’re not careful. When someone looks at a chart and sees an indicator line cross over another line or, as in this case, move outside of a range or set of boundaries, they are natural inclined to think it means a change in price direction...
However, with the Donchian Channel the opposite is true – a breakout actually signals that a new trend may be establishing itself:
A price breakout on the high side of the channel, it can indicate the start of a new upward trend – signaling to traders to go long and cover shorts.
A price breakout out on the low side it can indicate the start of a new downward trend – signaling to traders to sell short and liquidate long positions
Of course, there is just one small problem – the Donchian Channel indicator isn’t always right. NO indicator is. And that, as any experienced, successful trader knows, is why basing your trading decisions on just one indicator alone is a surefire way to reach a $0 account balance in your trading portfolio in no time flat.
Again, our earlier oil video is a perfect example of this...
If you had acted on the Donchian Channel breakouts alone, you would’ve been on the wrong side of the move every time.
If you had acted on the Williams %R indicator alone, your timing would have been off and you would’ve missed out on a significant amount of profit.
And, if you had acted on the Trade Triangles alone, you would have wasted time and trading fees on smaller, inconsequential trend shifts (whipsaws) that occurred between the true, money-making moves.
Combine all three though and now you’re cooking! You would have caught – and profited from – two explosive moves (and a potential third one) in 8 weeks without being caught up in any little whipsaws.
With just a little know how and the right tools you can open up a whole new world of profits and trading success.
All the best to you,
President of INO.com
Co-founder of MarketClub