Hopefully, all of you will be good and happy and enjoying your good health with the grace and blessings of Almighty Allah. Today, I am here to present the homework post for dear professor @lenonmc21 in Week 1 of Season 5 of Steemit Crypto Academy. So, let's turn towards the task without any wastage of time.
There are some questions that are asked by the professor as the assignment of this week and I will explain all of them in the given order.
Explain and define in your own words what the Donchian Channels are?
As we all know that the markets of cryptocurrencies are so volatile that the next movement of the price action is unpredictable. However, the technical analysis could be done by using different technical analysis tools and indicators are also one of them. There are many indicators that help traders to predict the next movement of the market. Donchian Channels are also one of them. Let's discuss this indicator briefly.
Donchian Channels are the technical indicators that are first time developed by a great expert named Richard Donchian. Thus, the name of the indicator is also set on the basis of the inventor's name. Donchian Channels indicator was developed in the year 1950.
The Donchian Channels indicator consists of three lines (moving averages joined together). The upper line of the indicator is called the Upper Band, the lower line of the indicator is called Lower Band and the middle line is called the Median Band. These three lines are used to determine the volatility of the market, trend reversals, or trend breaks, and the most interesting one is the Overbought and Oversold levels. We can determine all these three things at the same time.
The upper band of the indicator tells us about the highest price the market touched, the lower band indicated the lowest price the market has touched, and the area between these two bands is actually called the Donchian Channels. This indicator helps us to identify the extreme trending market (bullish or bearish) when the price touches the upper and lower band respectively. The average of the higher and the lower prices is shown by the middle line.
Thus, the three lines of this indicator help us to determine the oversold and overbought levels. In this way, we can make good entry and exit decisions, keeping in view, the current trend of the market and the expected trend.
An example of the Donchian Channels indicator is shown in the below screenshot.
Does it explain in detail how Donchian Channels are calculated (without copying and pasting from the internet)?
As we have discussed before that the Donchian Channels indicator consists of three lines and the construction of the channel is calculated by these lines. The upper band of the indicator shows the highest price touched in a particular period and the lower band shows the lowest price that is touched in that period. The middle or median band represents the average of the other two lines.
Calculation of the Channels:
Before calculating the channels of the Donchian indicator, we must have the following points in our minds.
- Upper Band: It represents the highest price in the previous period n.
- Lower Band: It represents the lowest price in the previous period n.
- Median Band: Difference of Upper and Lower Band divided by 2.
Here, n is the number of periods we are taken. The number of periods(candles) is different for different trading strategies. The daily traders or short-term traders use short timeframes while the long-term traders use long timeframes.
To calculate the Channel, firstly, we have to select the period n of our analysis. Then, we will calculate the high and low points of the upper and lower bands respectively. After that, we will select the maximum reading given by both bands. At last, we have to take the average of both values (low and high). The median band will be calculated.
Mostly, we take the number of periods (n) 20 as it is the average trading day in a time period of a month.
Explain the different types of uses and interpretations of Donchian Channels (With examples of bullish and bearish trades)?
As we have discussed some basics about the Donchian Channels indicator in the above sections, so now I will discuss some use cases of these indicators. So, have a look.
- Volatility of the Market:
The first and the most important use of these indicators is that Donchian Channels indicators are used to determine the volatility of the market. By the use of this indicator, we can determine that whether the market is less volatile or high volatile. This thing can be simply determined by the space between the lower and upper bands of the indicators(width of Donchian). If the bands of the indicators are separated widely from each other, the market is said to be highly volatile. And if the bands of the indicators are closer to each other, the market is said to be less volatile and this period is simply known as "Range Phase". An example is shown in the below screenshot.
- Trend Indicator:
The Donchian Channels indicator is also used to determine the current trend of the market. We can easily predict whether the market is in a bullish or a bearish trend by comparing the price line and the median line. This can be indicated as follows.
Bullish Trend (Overbought):-
The Bullish trend can be indicated by comparing the position of the price line and the median line of the indicator. When the price line of the market is trading above the median line of the indicator then the market is said to be in an uptrend or Bull. This indicates that the buyers are in a strong position in the market. The uptrend is continued unless the price line touches the upper band of the indicator.
When the price line touches the upper band of the indicator, this condition is called an Overbought condition and a trend reversal is to be expected at this point. If the price line breaks the upper line, the holding position could exist and if it does not break the upper line, the exit position could exist. An example of a Bullish trend is shown in the below screenshot.
Bearish Trend (Oversold):
When the price line of the market is trading below the median line of the indicator then the market is said to be in a downtrend or Bear. This indicates that the sellers are in a strong position in the market. The downtrend is continued unless the price line touches the lower band of the indicator.
When the price line touches the lower band of the indicator, this condition is called an Oversold condition and a trend reversal is to be expected at this point. If the price line breaks the lower line, the waiting position could exist and if it does not break the lower line, the entry position could exist. An example of a Bearish trend is shown in the below screenshot.
Make 1 inning using the "Donchian Channel Breakout Strategy" and make 1 inning using the "Reversal and Retracement Strategy". You must explain the step by step of how you analyzed to take your entry and make them into a demo account so I can evaluate how the operation was taken.
This strategy is commonly used in the cryptocurrency world. In this, we predict the trend of the market by indicating whether the price line is trading below or above the median line. If the price line is trading above the median line and making high higher formation, we will place a buying order. And if the price line is trading below the median line and making lower low then we will make a sell order.
First of all, open the https://www.tradingview.com and go to the charts option.
I selected the ADA/USDT pair for my trade. So, I opened the chart of this pair.
The market was in a ranging period after a strong bullish trend so I set the timeframe to 1h.
Then I applied the indicator and set the period to 20 candles.
A trend reversal is to be expected after a long bearish trend. So, I entered the market by setting the Stop Loss below the current price and Take Profit above the mean price.
The result of my trade goes to profit as shown in the below screenshot.
For the implementation of this strategy, it is necessary to understand that the trend takes a retracement for its continuation and the traders can take advantage of these retracements.
All the steps are the same only the following changes occur.
After the setting of the period, I notice that the bearish trend has started and I enter the market by sell position. I set the Take Profit and Stop Loss at the ratio 0f 1:2 and my entry is as shown in the below screenshot.
As we all know that the market of cryptocurrencies is so volatile that it is impossible to predict the next turn of the market. But with the involvement of technical indicators, it becomes easier. The Donchian Channels indicators is a technical analysis tool that is used to determine the volatility of the market, the trend of the market, and the strength of the trend at the same time. There are three lines of this indicator. The upper line is called Upper Band that shows the highest point. The lower line is called the lower band that shows the lowest point and the middle line is called the median band that shows the average of the other both (Upper and Lower). So, the traders can make good trading decisions by understanding the Donchian Channels indicator.
So, that's all about the task for this week. Hopefully, all of you will like this post.