Donchian Bands Momentum Forex Trading Strategy

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Donchian Bands Momentum Forex Trading Strategy

Momentum trading is probably one of the fastest ways to grow your account when trading the forex market. This is because momentum trading is inherently fast paced. When the market is moving with strong momentum, price moves very quick. Price could rise or drop significantly in a short amount of time. Traders who were able to trade in the right direction stand to gain so much in a single trending market move.

However, momentum trading also carries with it a certain degree of risk. Momentum entails that traders should wait for the market to move significantly with strong momentum in one direction before they enter the market. This means that price would have already traveled a significant distance from the swing point. Contrarians or mean reversal traders who are trading on the lower timeframes would see it as either an overbought or oversold price condition and would take the opposite trade direction. At times this would cause price to instantly reverse leaving many momentum traders at the peak in a buy trade or at the bottom in a sell trade. This is called a whipsaw.

Many momentum traders are guilty of chasing price. However, momentum traders should also accept the fact that there is a certain degree of possibility that these scenarios may occur. Instead, traders should look for ways to trade momentum trading setups that are rule based and have a relatively higher probability of resulting in a win rather than a whipsaw.

Donchian Bands Momentum Forex Trading Strategy is a systematic momentum trading strategy that makes use of confluences coming from a few indicators in order to qualify a trade setup.

Donchian Bands

The Donchian Bands is a trend following indicator which is a band or channel type of technical indicator. It plots three lines which form a channel or band based on the range of price movements within an n number of periods.

The Donchian Bands have three lines. The upper line is the highest high within an n number of periods. The lower line is the lowest low within the same number of periods. The middle line on the other hand is basically the median between the upper line and the lower line. This creates a channel like structure that should usually envelope price action.

The upper line could serve as a resistance line, while the lower line could serve as a support line. However, breaches beyond these lines with strong momentum could also be indicative of a strong momentum breakout from a market contraction phase.

Stochastic Oscillator

The Stochastic Oscillator is a momentum indicator which is part of the oscillator family of technical indicators. It is one of the more popular and more widely used oscillators.

It is arrived at by comparing the closing price of a tradable security with its historical price range or average price movement over a period of time. The sensitivity of the Stochastic Oscillator lines can be adjusted by adjusting the period which it is based on.

The Stochastic Oscillator is composed of two lines which oscillate within the range of 0 to 100. It also has markers at level 20 and 80. If the lines drop below 20, the market is considered oversold. If the lines breach above 80, then the market is considered overbought. Crossovers between the faster and slower line is interpreted as a momentum reversal signal. Crossovers that take place when the lines are below 20 or above 80 tend to have a higher probability since these reversal signals are in confluence with an oversold or overbought condition.

EMA Crossover Signal

EMA Crossover Signal is a trend reversal signal indicator which is based on the crossing over of two Exponential Moving Average (EMA) lines.

One of the most popular ways traders identify a potential trend reversal is by using the crossover of two moving average lines as a signal. The EMA Crossover Signal is based on this concept. However, instead of plotting two lines in a price chart, this indicator plots arrows signaling the occurrence of the trend reversal and pointing the direction of the trend reversal. This simplifies and systematizes the process of identifying potential trend reversal signals. Traders can then enter trend reversal setups based on the signals provided by this indicator.

Trade Setup

This trading strategy is a momentum strategy which is based on the confluence of all three indicators mentioned above.

The Donchian Bands act as the main momentum signal indicator. Momentum signals are generated whenever a momentum candle closes strongly above the upper Donchian Band or below the lower Donchian Band.

The Stochastic Oscillator is used mainly as a trend direction filter. Trend direction is based on how the faster Stochastic Oscillator line overlaps the slower line. Both lines should also cross over the midline to confirm the direction of the trend.

The EMA Crossover Signal serves as a confluence between a trend reversal signal and the momentum signal. Momentum signals using the Donchian Bands that occur after a recent trend reversal signal coming from the EMA Crossover Signal signifies that momentum in the new trend direction is picking up.

Indicators:

  • Donchian Bands
  • EMA Crossover Signal
    • Faster EMA: 10
    • Slower EMA: 20
  • Stochastic Oscillator
    • %K Period: 19
    • %D Period: 6
    • Slowing: 9

Preferred Time Frames: 15-minute, 30-minute, 1-hour, 4-hour and daily charts

Currency Pairs: FX majors, minors and crosses

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • The faster Stochastic Oscillator line should be above the slower line.
  • Both Stochastic Oscillator lines should cross above 50.
  • The EMA Crossover Signal indicator should plot an arrow pointing up.
  • A bullish momentum candle should close above the upper Donchian Bands.
  • Enter a buy order on the confirmation of these conditions.

Stop Loss

  • Set the stop loss on the support level below the entry candle.

Exit

  • Close the trade as soon as the EMA Crossover Signal indicator plots an arrow pointing down.

Donchian Bands Momentum Forex Trading Strategy

Donchian Bands Momentum Forex Trading Strategy 2

Sell Trade Setup

Entry

  • The faster Stochastic Oscillator line should be below the slower line.
  • Both Stochastic Oscillator lines should cross below 50.
  • The EMA Crossover Signal indicator should plot an arrow pointing down.
  • A bearish momentum candle should close below the lower Donchian Bands.
  • Enter a sell order on the confirmation of these conditions.

Stop Loss

  • Set the stop loss on the resistance level above the entry candle.

Exit

  • Close the trade as soon as the EMA Crossover Signal indicator plots an arrow pointing up.

Donchian Bands Momentum Forex Trading Strategy 3

Donchian Bands Momentum Forex Trading Strategy 4

Conclusion

Momentum trade setups based on a momentum candle breaching the Donchian Bands is a strong entry setup in itself. It signals a strong momentum breakout coming from a contracted phase.

The addition of the Stochastic Oscillator and EMA Crossover Signal indicator as a trend filter adds another layer of confluence which greatly increases the likelihood of a successful momentum breakout.

Traders can easily use this strategy to gain profit from the market.


Forex Trading Strategies Installation Instructions

Donchian Bands Momentum Forex Trading Strategy is a combination of Metatrader 4 (MT4) indicator(s) and template.

The essence of this forex strategy is to transform the accumulated history data and trading signals.

Donchian Bands Momentum Forex Trading Strategy provides an opportunity to detect various peculiarities and patterns in price dynamics which are invisible to the naked eye.

Based on this information, traders can assume further price movement and adjust this strategy accordingly.

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How to install Donchian Bands Momentum Forex Trading Strategy?

  • Download Donchian Bands Momentum Forex Trading Strategy.zip
  • *Copy mq4 and ex4 files to your Metatrader Directory / experts / indicators /
  • Copy tpl file (Template) to your Metatrader Directory / templates /
  • Start or restart your Metatrader Client
  • Select Chart and Timeframe where you want to test your forex strategy
  • Right click on your trading chart and hover on “Template”
  • Move right to select Donchian Bands Momentum Forex Trading Strategy
  • You will see Donchian Bands Momentum Forex Trading Strategy is available on your Chart

*Note: Not all forex strategies come with mq4/ex4 files. Some templates are already integrated with the MT4 Indicators from the MetaTrader Platform.

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