Donchian channels are a measure of market volatility, much the same as Bollinger bands
and are about as simple as you can get:-

Take the highest period maximum and the lowest period minimum for last n periods, and produce an area. So, a stable price over preceding period will squeeze the Donchian channel, a more volatile price range will expand it.

Never much used in forex trading, and why, when Bollinger bands have superseded this approach…

Download the indicator:- donchian_channels

You’ll need to download audioplus.mq4 file below, and save to your MetaTrader\Experts\ directory.

You’ll also need 2 .wav audio files serving as the signal to tell you either profit or loss.
These go in your “\MetaTrader\Sounds\” directory.

The inputs to be coded are :

Distance – distance of profit (not pips) for when the Expert Advisor sound is triggered
AudioPlus – the name of the sound file played when the price reaches set profit
AudioMinus – the name of the sound file played when the price reaches set loss

Compile (see add ea to metatrader, if you’re not sure) and everything should work fine.

Download:
audioplus.zip

Here’s some nice clean charts – EUR/USD 1-hour, from yesterday and the day before. Overall, you’d probably describe confidence in either currency as weak, with each successive news event setting off a trend one way or the other. The market is undecided, but these are relatively large swings in terms of pips – a sign of the volatile times.

All the indicators are doing what they’re supposed to:-
Here’s MACD (moving average convergence/divergence) – a trend-following momentum indicator.

And here’s Average True Range, basically market ‘volatility’.

Worth some examination in understanding the behavior of indicators. All the data is there, so backtest your system, and backtest yourself.

Easy to day-trade off these charts – swing trading over the longer term, that’s quite another matter…

This is (largely) the principle behind moving average convergence/divergence, MACD

Here’s an example – GBP/USD 1-hour chart from a week or so back, with (roughly speaking) a double-top pattern formed, the shorter period MA, in red, crossing below the purple longer period MA, and the market going bearish. No real problem with this example.

Except, opinion is divided, or even against, using MA crossovers in forex as a general rule. As with all trend-following systems, it’s going to work well enough if the market is subject to a strong trend, but will be less effective when the market is range-bound. Sometimes, there just isn’t going to be a trend, no matter how hard we look for one..In the hypothetical situation of a market that flatlined over the period of the longer moving average, all averages would converge towards the single price level – where’s the signal?

Other MA indicators
The flaw in the logic of trading moving average crossovers also applies to some applications of MACD – Moving Average Convergence/Divergence – and DMI – Directional Movement Indicator. If you really are brave or stupid enough to analyse a range-bound market, get away from moving averages – you might (might) have some success by looking at oscillator indicators – stochastics etc.

It’s also one of the cardinal sins of a forex practice account – you can definitely come away from these with the idea that moving average crossovers can be profitably traded in the short-term.

It’s another J Welles Wilder production, starting with an index he called the True Range, defined as the greatest of the following 3 values:

Current High – the current Low
Absolute value of (current High – previous Close)
Absolute value of (current Low – previous Close)

The Average True Range is commonly calculated using 14 periods. See the chart below, showing a period of level trading, relatively low volatilitiy, followed by a down trend and higher volatility. Standard Bollinger bands are also plotted.

The indicator can also be smoothed by including the ATR for previous time periods, ie.

Multiply previous 14-period ATR by 13,
Add the most recent TR,
Divide by 14.

ATR was designed with particular reference to commodity markets, usually more volatile than stocks, and also subject to limit moves (when a commodity opens above or below its maximum permitted move and is therefore suspended for the session).

One question that could be asked in reference to the forex market, is what does the ATR do, that isn’t done much more efficiently and revealingly than Bollinger bands…?

Time to break out other oscillators… here’s good old MACD.

No signal to buy, which you would also find with the slightly-maligned Awesome Oscillator. So how not bite on this whipsaw and pile into an imaginary reversal too quickly? – double-check the indicators, and – I would suggest, being naturally over-cautious – be very cautious in these situations…

Calculation
Current Average Price: *Close = (Open + High + Low + Close) / 4

Previous Midpoint: *Open = [*Open(Previous) + Close(Previous)]/2

Maximum value: *High = Maximum (High, *Open, *Close)

Minimum value: *Low = Minimum (Low, *Open, *Close)

Otherwise, all the same chart patterns can be applied to Heiken Ashi candlesticks – giving a smoother picture. Probably more used in commodities and equities than in forex trading – although some forex traders do use Heiken Ashi bars for calculating exit strategies.

Tenkan and Kijun lines
Tenkan or conversion line (red) – (Highest high + lowest low) / 2, calculated over the past 7 or 8 periods.
Kijun or base line (blue) – (Highest high + lowest low) / 2, calculated over the past 22 periods.

These are moving averages: Tenkan crossing from underneath the Kijun = bullish,
while crossing overhead = bearish,
(very similar to MACD crossover signals).

The cloud (Kumo), levels of support and resistance.
Senkou Span A (light brown) = (Tenkan + Kijun) / 2, plotted 26 periods ahead.
Senkou Span B (lilac) = (Highest high + lowest low) / 2, calculated over the last 44 periods, but plotted 22 periods ahead.

Chikou Span Light Green
Current price moved back 22 periods ago (sometimes 26).

Signal strength
Strong – A strong buy when the Tenkan crosses above the Kijun from below. A strong sell signal when the opposite happens. Both of these crosses must be above the Kumo.

Normal – A normal buy signal when the Tenkan crosses above the Kijun from below. A normal sell signal when the opposite. Within the Kumo.

Weak- A weak buy signal occurs when the Tenkan crosses above the Kijun-Sen from below or sell if the opposite but this time below the Kumo.

Overall strength – Strength is shown to be with the sellers if the Chikou Span is below the current price. Strength is shown to be with the buyers when the opposite is true.

Support/resistance – If the price enters the Kumo from below = resistance. If the price is drops into the Kumo = support.

Trends – Current price related to the cloud, Kumo. In very general terms if the price action is above the cloud, the trend is bullish – if below the cloud, a bearish overall trend.

%R = (highest high over x periods – close) / (highest high over x periods – lowest low over x periods) * -100

The range is from 0 to -100 with above -20 = overbought, and below -80 = oversold.

Commonly, Williams %R is calculated using 14 periods and can be used with any time frame. The diagram shows 2 Williams %R plots, using 14 periods (green) and 28 periods (blue).

In practice, as shown, the 14-period %R can be bit jumpy, to say the least – and it requires a fair amount of caution not to be set off by its whipsaws. The 28-period is a calmer sort of guy…

Always remember that overbought doesn’t necessarily = sell now and vice-versa with oversold. The overbought period can continue without reversal, so looking at signals of reversal becomes important eg. waiting for the Williams %R to cross -50 as a confirmation.

The flag looks like a rectangle directed against the trend, over a period of 5 to 15 candlesticks. Here’s an example in a bear market

The flag pattern is often accompanied by a decrease in trading volume, followed by a increase on resumption of the trend – but bear in mind that this is also likely if and when the whole trend itself is over.
It’s useful to note that the flag pattern may be considered to be part of the trend, so even following the breakout, the price may move in the same range, with similar levels of resistance or support, as before the pattern. Notice also its similarity to the classic model of waves, in Elliot wave theory.