- 1 How to use Donchian Channel
- 2 How to prepare the chart to trade Donchian Channel / RSI strategy
- 3 Binary options strategy with the RSI and the Donchian Channel indicators
- 4 How to make the best of the strategy that combines the RSI and the Donchian Channel indicators on IQ Option
- 5 Pros and Cons👍👎
- 6 Summary
- 7 Q&A Section💡
- 8 GENERAL RISK WARNING
Today we will talk about such a mixture of two popular indicators, the Relative Strength Index and the Donchian Channel. The indicators are technical analysis tools that help in identifying the best entry points for the trades. Most can be applied as they are, but sometimes they function better in combinations.
How to use Donchian Channel
Before we turn to strategy, we would like to remind you what the Donchian Channel is.
The Donchian channel was developed by trader Richard Donchian, one of the pioneers of technical analysis. A Donchian Channel defines two lines on a chart:
- One line is the highest peak in a specified period.
- The second line is the lowest low in a given period.
You, as a trader, can set any time period you wish, but the Donchian system defaults to 20 days.
Donchan Channel formula
The Donchian Channel indicator simply takes a user-defined number of time periods and calculates the upper and lower values of the range. It draws two lines on the chart according to the Donchian Channel formula. This simple formula reads as follows:
- The top line of the range is the highest price in the last n periods
- The bottom line of the range is the lowest price in the last n periods
The default setting for the number n is 20 in MetaTrader 4, but you can change this value at your discretion. Also, note that IQ Option version of the Donchian Channel indicator also specifies the third line. This middle line is simply the average obtained from the higher and lower lines, according to the following formula:
Middle line = (high of n periods + low of n periods)/2
How to prepare the chart to trade Donchian Channel / RSI strategy
Once you are logged in to the IQ Option account, you have to decide what financial instrument you are going to trade during this session. Choose the Japanese candlestick type of the chart and set the candles period for 1 minute. Now you are ready to add the indicators.
The Relative Strength Index
Click on the Indicators icon and find the RSI under the Indicators tab. You can also type its name in the search box. The period for the RSI should be set for 14.
You can identify the oversold and overbought areas with the RSI indicator. The asset falls into the oversold zone when the RSI line drops below the value of 30. The asset is in the overbought area when the indicator rises above the 70 line.
The Donchian Channel
Repeat the procedure for the Donchian Channel. Its period should be set for 20.
The Donchian Channel is the indicator that counts 20 candles interval. Professional traders have discovered that the price in the market has a tendency to change its course every 20 days. There is never a 100% guarantee it will happen, but it is very probable. So the traders have started to count 20 candles intervals to determine the moment the trend will reverse. The good news is you do not need to count it anymore because the Donchian Channel indicator is doing it for you.
For both indicators, you can choose to change the parameters like the colour and the width of their lines. Select the ones that suit your preferences best.
Saving the template
The IQ Option platform offers a possibility of saving the template so you do not have to look for the indicators separately every time you wish to use them. In order to do that, press the Indicators icon once again, then click on the Templates tab and choose “Save Indicator Template”. You will be able to provide the name for your new set of indicators.
Next time you wish to trade with the strategy which joins the RSI and the Donchian Channel, just go to the Templates tab and choose the one you need.
Binary options strategy with the RSI and the Donchian Channel indicators
You have both indicators added to your chart. The Donchian Channel is showing the highest high and the lowest low within the last 20 candles interval. The RSI line is visible below the price chart. You will have to observe both indicators carefully.
How to open a long binary option with the strategy that combines the RSI and the Donchian Channel
First, you should focus on the Donchian Channel. You are looking for the moment when the candle bar crosses the lower band of the channel. Now, you should shift your focus to the RSI indicator window. It will cross the line 30 on its way up and that is the moment you should enter the trade. You can hold it open for about 5 minutes.
How to open a short binary option with the strategy that combines the RSI and the Donchian Channel
The situation looks opposite in case of opening a short binary option. First, you are waiting for the price bar to intersect the upper band of the Donchian Channel indicator. Once this happens, you ought to follow the RSI line. You are looking for the moment when it leaves the overbought area and moves below it. Enter a short trade for around 5 minutes.
How to make the best of the strategy that combines the RSI and the Donchian Channel indicators on IQ Option
Apply the strategy in the markets that can be characterised as normally volatile. These are the mid-morning and the night trades for the main currency pairs such as EURUSD, USDJPY, GBPUSD, USDCAD, AUDUSD as well as for trading Gold.
Follow the economic calendar and check for the news that may influence your instrument. The price movements use to be unexpected after such news announcements.
The strategy works best for opening quite short transactions. If you are using the 1-minute chart, hold the positions open for 5 minutes that is 5 times longer than the candles period. If you are using the 5-minute chart, you can open the transactions for a duration of 30 minutes.
The strategy is based on both indicators working together. Always check all conditions are met and resist the urge to enter the transaction when the RSI does not cross the oversold or overbought areas.
Pros and Cons👍👎
- ✅ Enhances trading accuracy by combining two complementary indicators.
- ✅ Helps identify potential trend reversals and entry points in the market.
- ✅ Provides a systematic approach to trading, reducing emotional decision-making.
- ❌ No strategy is foolproof; combining indicators doesn’t guarantee success.
- ❌ May generate false signals in some market conditions.
- ❌ Requires close attention to multiple indicators, which could be overwhelming for some traders.
|Donchian Channel Parameters
|Default period: 14
|Default period: 20
|Overbought level: 70
|Upper band: Highest high of the last 20 periods
|Oversold level: 30
|Lower band: Lowest low of the last 20 periods
|Signals: Crosses above/below overbought/oversold levels
|Signals: Price crossing the upper/lower bands
When you apply the strategy correctly, you will receive quite strong signals for opening the positions. Moreover, the strategy based on the Donchian Channel and the RSI indicators is not difficult to use.
Remember that IQ Option has a demo account in its offer. Use it to learn how the strategy works. This ensures you will not lose money from your capital while you gain experience in trading with a strategy you have just learned.
You are welcome to leave a comment in the comments section below.
Enjoy your trading!
- Q1: Why is the default period for RSI set to 14?
A1: The default period of 14 is widely used as it provides a good balance between sensitivity and reliability, making it suitable for various market conditions and trading styles.
- Q2: Can the RSI and Donchian Channel indicators be used on different timeframes?
A2: Yes, both indicators can be applied to various timeframes, but it’s crucial to adjust the settings according to the specific timeframe being used to maintain effectiveness.
- Q3: How can I reduce the number of false signals generated by this strategy?
A3: To reduce false signals, consider using additional indicators or techniques such as trend lines, support and resistance levels, or even fundamental analysis to confirm the signals generated by the RSI and Donchian Channel combination.
- Q4: Can this strategy be used for other financial instruments apart from binary options?
A4: Yes, the RSI and Donchian Channel strategy can be applied to other financial instruments such as stocks, forex, and commodities. However, it’s essential to adjust the settings and trade management techniques to suit the specific instrument and market conditions.
- Q5: How can I practice this strategy before trading with real money?
A5: Consider using a demo account to practice and refine the strategy before applying it to a live trading environment. This will allow you to gain experience and confidence in the system without risking your capital.
GENERAL RISK WARNING
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