Wednesday, June 11, 2008

Modified Donchian Channel

For trading priceaction with double top (DT), double bottom (DB), high failure (HF) and low failure (LF) patterns the Donchian Channel (DC) is particularly suited, as it is a channel drawn on the Highest High and the Lowest Low within the given period.

But there is one disadvantage:

It won’t show you a HF or LF pattern as the channel will move up or down once the new High or Low has been made. Thus the channel will behave as if a breakout/breakdown is occurring when in reality prices will return into the channel and reverse.

Now I thought that drawing the DC not on High/Lows but on the highest Close and Lowest Close within the given period would solve that problem. It’s a bit tricky to do that, as Ensign will draw the Channel on the Highs and Lows even if you select the Close as datasource for the DC.

So we first need to add a Simple Average with length 1 based on the Close, which is in effect a Line on Close and then select that average as datasource for the DC. (Settings have been posted below)

And now you get a DC, which shows you not only DT and DB’s but also HF and LF patterns as marked in this ES chart (The thin yellow and green line is the modified Donchian Channel.


And here are the settings used