This video is a little bit different from our previous videos in that we show you some of the new improvements we've just added to MarketClub.
I just got the word from my business partner Dave Maher,
who is the technical part of the team that he had just upgraded the MarketClub charts. I was so excited at the improvements that I decided to rush over to our digital studios and create a new video. All credit goes to Dave and his team who did an outstanding job on this new MarketClub release.
One major improvement and one I believe you're going to really enjoy and profit from is a study called "Donchian Channels." This study is named after its inventor Richard Donchian who created this amazing technical juggernaut in the late 40s.
There are also a ton of other improvements like, cross hairs and a new 200 day moving average study which I think you'll enjoy. You might be surprised at how I use the 200 day moving average.
You can view this new video with our compliments. There are no registration requirements. Please enjoy and give your feedback on our blog. Thank you.
All the best,
Adam Hewison
President, INO.com
Co-creator, MarketClub
Liz,
Thank you for your feedback on our Donchian Channels trading tool. A time period of 100 days can work, but Richard Donchian's original work never mentioned a time period of that length. We prefer to offer his default setting and other settings you can test.
The Donchian Channel indicator is a great tool no matter how you use it.
All the best to you.
Adam
I am still trying to understand Dornchian channels. MC has max 50 day setting. Michael Covel's Trend Following book has Fidelity backtest of 100 day Dornchian channels as breakout signal - they seem to backtest very well. Why does MC use only 50 day and not 100 day?
Approximate relationship between Donchian values and Bollinger Bands.
The spread of the data about the mean, or range of the data will normally always lie between 4 standard deviations and 6 standard deviations (mean +/- 2SD mean +/-3SD). For any distribution of the data +/- 2SD will contain more than 75% of all the data and +/-3Sd will contain more than ~90% of the data. Take the range (span) of the upper and lower Donchian lines divide by 5, convert to a percentage of the 20 day moving average, then use that percentage as the "trading channel" or "Moving Average Envelope" on a 20-day moving average line. You now have an approximation of the 2.5SD Bollinger Band boundaries.
There is no "center line" in Donchian channels. It is the extreme value obtained in the previous default period time frame. The default time frame is 20 periods. The lines establish the criteria of a new "breakout" value.
Bollinger bands have centerline as their starting point. The boundaries are multiples of the RMS (Root Mean Squared) deviation of the individual deviations from the mean. The RMS deviation is also known as "the standard error of estimate" of that mean at each point along the line, or one-sigma. The usual default value is 2 standard deviations about the 20 period moving average.
I use 50 day and 2SD, 50 day and 3SD, and 200 day 2SD as I am convinced that the predictive value going forward is at most one third of the computation period.
Adam,
What is your preference when using moving averages? Simple or Exponential and why?
Thank you.
Thanks for the Donchian Channel. I have used this indicator before on a different software, but it is not a standard indicator in a lot of other trading softwares, which is a pity as Richard Donchian is the
"father" of trend following. When there is no Donchain Channel, I use Bollinger Bands, which both are basically the same, as the default centre line setting (basically a moving average setting) is also 20 in Bollinger.
Liz's question above on deciphering whether the price action touching the 20 MA is a pullback or reversal is a good question. The 20 MA can act as either Support or Resistance. E.g. If price from upper band goes down to touch 20 MA and does not penetrate further down, then there is support at 20 MA, and therefore it becomes a continuation of the upper trend. Conversely, if price from lower band goes up to touch the 20 MA and does not penetrate further up, then one can view this as resistance at the 20 MA and therefore it becomes a continuation of the downside trend. Obviously the confirmation of which comes from the MACD, depending on whether there is crossover and whether above or below Histogram. The crucial point is to watch for Support and Resistance at 20 MA, bearing in mind there can sometimes be false breaks. This is how I use the Bollinger Bands. Adam may want to correct me if I am wrong.
Happy trading!
Interesting video but disturbing for some of the specific content.
The moving average is the 200 periods average and only the 200 day if the data is incremented in days, there it represents about 10.5 months, if in weeks then just under 4 years, if hours then about one trading month. The direction it is heading can always be estimated by looking back 200 periods and see which will be dropped off and which will be added in to the calculation. In these times I have difficulty attaching much importance to what happened almost a year ago (for the 200 day); and 4 years, as they say, is history.
The former point shows up as you zoom in and out of the data when the shift causes the data to jump between daily, weekly and hourly data points and the line no longer bears the same relationship to the data points.
Donchian channels are normally drawn from the extreme values not the closing value. It was obvious in this chart that values extended beyond the channel.
The question about Bollinger Bands is interesting as it relates to statistically determined probabilities based on the variability of the previous data. The 2SD bands define the range within which more than 75% of all values have fallen irrespective of any assumptions about the distribution of the data, and 3SD 90% (Chebycheff's Inequality). If you buy when it dips below the 2SD line you know that more than 75% of those who bought in the previous period paid more than you and become resistance to a further decline. It suggest the extreme values statistically unlikely to then occur. The Donchian chanel describes the extreme value obtained in the previous time period, a value that has already "set the bar".
Welcome back Adam !!
I am looking for some more useful tips that can make me money.
We dont seem to have volume indicators on all of the charts, these would have given me some indication of the bottoming in March. Where are they?
Regards
Dennis
P.S When will the GBP start to reverse against the USD ?
Continuation of above....For example I am looking now at OIH and with Donchian channel I see several buy signals in the last two months. Now there is a pullback, is this a buying opportunity on pullback or a reversal?? Also, there is not much difference on the chart between this and the Bollinger banks, you would have similar signals. So what does Donchian channel add?
Thanks for the new tools, Adam. Can you explain how Dornchian channels are different from Bollinger bands? Also, after an up signal and return to the MA, how do you know this isn't a reversal in trend instead of a pullback?