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Never much used in forex trading, and why, when Bollinger bands have superseded this approach…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

General over-analysis is one thing – too many indicators on a chart, too complicated a system, with too many ifs and buts in it – and common enough when you’re starting out learning about forex.

But what can happen after a while, maybe when you’ve been generally successful, had a few nice winning trades, but also a few losers, bigger than you’d like, is that you just don’t want to click that trade button. Call it overcautiousness, fear of failure, whatever.

You know the trend was going bullish – but you couldn’t place a buy order. You hesitated, waiting for extra confirmation, another indicator to give a clear buy signal – and then the moment passed, the market moved – and you’ve missed the boat, never got filled.

First – everybody has losing trades, sometimes three in a row. And nobody is totally keen on losing green. You have to tell yourself that. But it does knock the confidence, you wouldn’t be human if you didn’t deflate you a little.

Sometimes the best way round this is make it part of your system to pick your indicators for their signals, and when the time comes, say yes, two confirmatory signals, I trust my system, I won’t think about the negatives, I’m going into the market -and if you’ve got this issue in the first place, you’re not likely to be the reckless type.

Dont overanalyze the actual trade. Make the trade and then manage the trade. If it isn’t a winner, get out of the market – and see if you can learn any lessons from it and move on. But you don’t get anything if you’re not at the table in the first place.

The Royal Bank of Australia (RBA) cut its rate by 100 basis points this morning- the fifth consecutive cut by the RBA.

Thursday will have a similar deal – the European Central Bank (ECB) and the Bank of England announce their interest rates. The ECB is forecast – only forecast – to keep things the same, resisting any pressure to cut – which the larger members of the EU, France, Germany, would prefer – but others, Portugal, for example are dead against it.

Ireland needs some rate cut just to try and get a bit of investment and trade moving. It might go down 25bp, in which case EUR/USD should spike on the news event.

GBP The Bank of England is forecast to cut again, maybe 50bp – and they really can’t go much further than that – if this doesn’t work, there’s no more room to move…

One thing is certain – prices are going to carry on swinging, so get your positions set and ready…

So why is it going to get better?
Hanging a bad position round your neck will suffocate you slowly. Better to cut it free and then you really can begin the process of learning then forgetting. Yes, learn from mistakes, it takes a bit of steel to go back and have a close look at what went wrong – it’s painful, no doubt about it – then keep the lesson and forget the feeling.
If you don’t, you’ll carry it for a day or two, and then – usually – your broker will do the job for you, like it or not. And those 2 days won’t have made you enjoy forex trading any more…

Don’t compound the error
The standard advice is “Don’t ever move your stop-loss order on a trade – unless it’s to lock existing profits”. Assuming you’ve made some estimation of the risk before placing the trade, why increase risk in a bad position? That’s hardly making sense – I can think of reasons to increase risk in a good position…
Compound your stake (in due time), not the error…

Was it your fault?
Markets do things that they’re not ’supposed to’. Events can strike out of a clear blue sky, forex indicators have been known to be misleading, however much skill you feel you have in their interpretation.

• Trading is not personal, it really is only business. Not even the evil gnomes at your broker’s office are going to be sitting there cackling at your expense, they’ve got other people to scam….
• It doesn’t mean that you as a human being are totally worthless… one, two, three trades don’t reflect on you as the complete person.
• So you’re going to be brave and stick in there… Bravery and stupidity? Often pretty damn close together…
• Everyone has made a loss – George Soros has made 5 losing trades in a row (and if he’d like to persuade me otherwise…).
• In just the same way as one winning trade isn’t everything – you’re not going to retire on one good trade – a bad trade just has to be added into the hard grind over months and years – it’s the long-term performance that defines success or failure.
• Wait for tomorrow to come – have another go.

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…?

Bull power = Current High – EMA of closing prices
Bear Power = Current Low – EMA of closing prices

Both of these are then plotted as histograms. The exponential moving average is usually 13-period as a good compromise.
See a (5-min) chart of Bears power on GBP/USD.

The theory runs that these indicators, though simple, are a method of spotting overbought/oversold conditions, and therefore going against the trend – a professional decision when all the ‘amateurs’ are going one way, knowing it won’t last long, to go the other way – slightly higher risk…

For example, a Buy signal: Trend is up as shown by EMA and Bear Power is negative but rising. (Bear Power moving higher from a bullish divergence strengthens a signal).
Sell signal – the reverse.

Bulls and Bears Powers can be combined into an oscillator and form the basis of the Elder-ray indicator, more popular in securities etc. than in the forex market.

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.

• Simple Moving Average (SMA)
• Exponential Moving Average (EMA)
• Weighted Moving Average (WMA)

With the weighted moving average, different recipes exist – the weighting may involve volume or such quotients – it’s more complex and perhaps best left for now.

Simple Moving Average (SMA):

where
P = price,
n = the moving average period.

Exponential Moving Average (EMA):

EMA_t = EMA_t-1 + (K[Price_t - EMA_{t - 1}])

where
t = current time period,
t -1 = previous time period,
K = 2 / (n + 1)
n = the EMA period.

If you know a bit of math, you see that there’s an iteration going on – not to worry if this isn’t your thing – the charting software does all for us nowadays…

The advantage of the exponential moving average is that it gives greater weight to more recent prices compared to older prices – what’s happened recently is likely to be that much more important, after all. With the simple moving average, all prices old or new have the same weight and the same influence on the plot.

Here’s 21-period SMA and EMA plotted together:

Red = Simple Moving Average
Purple = Expontential Moving Average

As you can see, the SMA is slower to respond to movements in price, but gives a smoother result – the EMA is quicker to respond, but at the expense of the odd false signal here and there – of course this can be juggled with to some extent by use of different periods.