The Donchian Channel binary options’ indicator is visually represented on a chart with bands. This indicator can be referred to the category of the trend indicators. Its plotting is based on maximum and minimum levels of prices, which are determined for the certain period of time. This auxiliary tool can be used in order to find good signals to buy the binary options for a breakout of the current resistance and support levels.
If the price on a chart breaks the upper bound, in other words, if it breaks the current resistance level, you can buy the Call option. If the opposite situation occurs, and the price breaks the current support level, you can buy the Put option.
Donchian Channel: principles of indicator’s plotting
In order to find out the way this indicator plots, it is necessary to know that is was created based on minimums and maximums of prices for the certain period of time. The Donchian Channel binary options’ indicator not only shows and follows the current trend, but also shows the current volatility in the market. As mentioned above, this indicator is visually represented on a chart in the form of lines, which form an envelope. This auxiliary tool reminds of the Bollinger Bands binary options’ indicator in some way. The lower band of the Donchian Channel plots on the price minimums and the upper band on the price maximums.
The prices within the Donchian Channel binary options’ indicator are located in the range between its extreme bands. Nevertheless, the significant difference of this indicator from other similar auxiliary tools with bands is that it is simple in calculating and plotting. Only extreme values of its minimum and maximum closing prices are used in its calculating.
Richard Donchian, who is the inventor of this binary options’ indicator, has offered the period 20 for work with this indicator. His recommendations are based on the certain facts. For example, if the length of period consists of one day, the Donchian Channel binary options’ indicator will show four-week and 20-days breakouts. And the technical analysis has a pretty large amount of trend and breakout methods which are based on the 20-days breakouts.
Donchian Channels indicator: variants of usage
If you use the period which is recommended by Richard Donchian, the upper line of indicator will show the maximum of prices for 20 periods. As for the lower line, it will show minimum price levels for 20 periods too. A good signal for the Call binary options’ purchase appears when a price breaks the upper line of the Donchian Channels binary options’ indicator from down to up. In order to buy the Put binary option, it is necessary to wait until a price breaks the lower line of indicator from up to down.
The indicator can be also used in order to search for the reversal points in the market. For example, if a price doesn’t manage to break the resistance or support line, there is a high probability that a price will rebound from a level and will move towards the opposite bound of a range. In this case, you can buy the option in the opposite direction to the current trend.
It is needed to mention that the best way to use this binary options’ indicator is in combination with other indicators, which will help to eliminate the false signals. It is also important to note that the Donchian Channel binary options’ indicator is the trend indicator, so it works only in the trend market. In addition, it is very useful in work with those trading strategies which are designed for the abrupt movements.