Stock Trading Lesson A Test to Find the Best Moving Average Sell Strategy
Richard Donchian created a trading system many years ago that was used mainly on commodities (and stocks). However with so many people now choosing to trade the forex markets, it's worth discussing how effective this system can be trading the major currency pairs.
The system itself is relatively simple. It is basically a breakout system which aims to take advantage of new 4 week highs and lows. You simply go long when a new 4 week high is made and go short (or close long positions) when a new 4 week low is made.
This does sound far too simplistic but it can actually be a very profitable system. The reason why it is so effective is because these new 4 week highs or lows often mark the beginning of a new long-term trend. These trends can last several months and can yield substantial profits so they will usually cancel out many of the losing trades that turn out to be false breakouts.
In the forex markets this system tends to work well because currencies will often trend in the same direction for several months, so this system will capture a huge slice of these trends. Another reason it works so well is that these 4 week breakouts are observed by many other traders and financial institutions all over the world. They are invaluable for predicting support and resistance price levels from an objective point of view.
The Donchian Bands are typically used as a breakout indicator, it defines resistance and support levels and generate entries as price breaks these levels. As lows and highs usually correlate with support and resistance levels, this indicator is useful in objectively defining these areas.
Having said that, it's also used as a reversal signal - entering when price touches a band and reverses its direction. Before utilizing the indicator in this manner, confirm the validity of the psychological level by demanding a minimum of 2 touches at the level. This ensures that the signal is solid and increases its dependability.
One other way of trading the Donchian Band is utilizing its middle band. The middle band is the average of the upper and lower band, and can also be used to quantify trend. Entry signals are generated in the following way: When price crosses the middle band from below - buy, and when price crosses from above - sell. It's really a potent signal when trend strength is is verified with other indicators like the MACD and stochastic.
There are numerous methods for deciphering and trading the Donchian Bands. Probably the most commonly used is definitely the breakout:
1. Long Trades - Long trades are entered when price breaks above the 20-period upper Donchian Band. Conservative traders wait for price to close above the Donchian upper band to enter the trade.
2. Short Trades - Short trades are entered when price breaks below the 20-period lower Donchian Band. Risk adverse traders wait for price to close below the Donchian lower band to get into the position.
Another approach to using Donchian Bands is using the middle band as the buy or sell signal line. Entry signals are produced in the following way: When price crosses the middle band from below - buy, and when price crosses from above - sell.
Donchian's Stock Trading Rules
Richard Donchian commenced his Wall Street livelihood in 1930.
The system itself is relatively simple. It is basically a breakout system which aims to take advantage of new 4 week highs and lows. You simply go long when a new 4 week high is made and go short (or close long positions) when a new 4 week low is made.
This does sound far too simplistic but it can actually be a very profitable system. The reason why it is so effective is because these new 4 week highs or lows often mark the beginning of a new long-term trend. These trends can last several months and can yield substantial profits so they will usually cancel out many of the losing trades that turn out to be false breakouts.
In the forex markets this system tends to work well because currencies will often trend in the same direction for several months, so this system will capture a huge slice of these trends. Another reason it works so well is that these 4 week breakouts are observed by many other traders and financial institutions all over the world. They are invaluable for predicting support and resistance price levels from an objective point of view.
The Donchian Bands are typically used as a breakout indicator, it defines resistance and support levels and generate entries as price breaks these levels. As lows and highs usually correlate with support and resistance levels, this indicator is useful in objectively defining these areas.
Having said that, it's also used as a reversal signal - entering when price touches a band and reverses its direction. Before utilizing the indicator in this manner, confirm the validity of the psychological level by demanding a minimum of 2 touches at the level. This ensures that the signal is solid and increases its dependability.
One other way of trading the Donchian Band is utilizing its middle band. The middle band is the average of the upper and lower band, and can also be used to quantify trend. Entry signals are generated in the following way: When price crosses the middle band from below - buy, and when price crosses from above - sell. It's really a potent signal when trend strength is is verified with other indicators like the MACD and stochastic.
There are numerous methods for deciphering and trading the Donchian Bands. Probably the most commonly used is definitely the breakout:
1. Long Trades - Long trades are entered when price breaks above the 20-period upper Donchian Band. Conservative traders wait for price to close above the Donchian upper band to enter the trade.
2. Short Trades - Short trades are entered when price breaks below the 20-period lower Donchian Band. Risk adverse traders wait for price to close below the Donchian lower band to get into the position.
Another approach to using Donchian Bands is using the middle band as the buy or sell signal line. Entry signals are produced in the following way: When price crosses the middle band from below - buy, and when price crosses from above - sell.
Donchian's Stock Trading Rules
Richard Donchian commenced his Wall Street livelihood in 1930.
