When you trade in the foreign currency market you quickly become familiar with important tools like the Bollinger Bands. Many experts have even studied the Keltner channel, another superb indicator for gaging market conditions. However, there are others that although have not been a staple of technical analysis, have proven to be just as interesting. Some of these include the Donchian channels. They’re perfect for isolating opportunities to capture gains. And best of all, they can be implemented when conducting technical analysis to trade futures, or as yet another one of the sophisticated options strategies.
You may find that your Forex software and many of the Forex trading platforms offer Donchian channel studies; they’re rather simple to interpret even by those who lack vast experience trading currencies. Despite the fact that the technique was created for other financial markets, it’s ideal for spotting short spikes and even long-term movements. The channels are the brain child of Richard Donchian, who’s known in the trading business world as the “father of trend following.” His strategy is based on a 20-period moving average and helps identify support and resistance, thus producing signals to enter into a position.
When you see that the currency price breaks through and closes by the upper band, it’s time to go long. When the currency price pierces through the lower band, it’s time to go short. Don’t assume the breakouts are reversals. If the rates pierce through the levels, they create new highs and establish trends.