Last updated: October 4, 2022

How to use Donchian Channels on Thinkorswim

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How to use Donchian Channels on Thinkorswim

Donchian Channels are a technical analysis tool that traders use to measure volatility. The theory behind the Donchian Channel is that prices tend to stay within the boundaries of the upper and lower bands for a certain period of time, you can then use this information to decide when to buy or sell a security.

We will take a look at some of the methods of implementing Donchian channels on Thinkorswim, but first let’s give an overview of the theory and trading strategy.

How to use Donchian Channels on Thinkorswim- Donchian chart customization on Thinkorswim

How to use Donchian Channels on Donchian chart customization on Thinkorswim

What are Donchian Channels on Thinkorswim and How Are They Used?

Donchian Channels are a way to measure how volatile something is. The theory is that prices tend to stay within certain boundaries for a certain amount of time. So if you see that the price has gone outside of those boundaries, you might want to think about buying or selling.

There are a lot of different ways to use Donchian Channels on Thinkorswim, but one popular way is to use them as a filter for when you want to enter or exit a trade.

For example, you could wait for the price to break out of the channel before entering into a trade. Or you could use the channels as confirmation that a trend has reversed and sell short when the price falls below the lower band.

You can change how long the time period is and what kind of price it looks at (like close, open, high, or low) to make it fit what you're looking for.

There are a number of different settings that you can use to customize the Donchian Channel indicator on Thinkorswim. 

For example, you can change the length of the time period used to calculate the bands, as well as the price type (e.g., close, open, high, low).

How to use Donchian Channels on Thinkorswim- Thinkorswim Donchian chart strategy interface

Thinkorswim Donchian chart strategy interface

Implementing Donchian Channels on Thinkorswim: Built-in Setting

The built-in indicator is based on research by Oscar G. Cagigas in his article "The Degree of Complexity" which was published in the February 2014 issue of Stocks and Commodities magazine.

First you need to get the highest high and the lowest low price on two periods, you can change this setting, but the default is 40 and 15. 

The upper band value is equal to the highest high on the shorter period, if there is a simulated short position. 

Otherwise, the highest high on the longer period is used. 

The lower band uses the lowest low on the shorter period, if there is a simulated long position.

If there isn’t a position or if it is short, then the lowest price on the longer period is plotted instead.

You can then add simulated orders using these settings:

-(BTO) Buy To Open: The high price is greater than the previously calculated highest high using the longer period.

-(STO) Sell To Open: The low price is less than the previously calculated lowest low using the longer period.

-(BTC) Buy To Close: The high price is greater than the previously calculated highest high using the shorter period.

-(STC) Sell To Close: The low price is less than the previously calculated lowest low using the shorter period.

We explain more about BTO, STO, BTC and STC here.

The input parameters used are:

  • entry length = the longer period, measured in bars
  • exit length = the shorter period, measured in bars
  • atr length = the number of bars used to calculate the ATR(Average True Range)
  • atr factor = factor used to work out volatility factor
  • atr stop factor = factor used for stop loss
  • atr average type = type of moving average used

Filters can be used to add more complexity and you can read more about it here.

Implementing Donchian Channels on Thinkorswim: Older User Code

Future.io have another version dating from 2013, though I imagine using a newer one  is a wiser move

Another free option again dates from 2013 so it is probably not wise to use it at this point. The author lists the code for various strategy including long entry, and short entry as well as long exit and short exit. So if you are interested in coding Thinkscripts that might be beneficial for you. 

The indicators looked like this in 2013

How to use Donchian Channels on Thinkorswim- Outlook of Indicators in year 2013

2013 Indicator's Outlook

And they also have a video from that time which may prove useful

The code they used was based on this code from October 2008, right when the global financial crash was happening!

How to use Donchian Channels on Thinkorswim-Donchian channel thinkscript short entry strategy coding

Donchian channel thinkscript short entry strategy coding

Implementing Donchian Channels on Thinkorswim: UseThinkScript forum code from ClassicScott

On April 17th 2022 a user updated an old thread dating from March 2019 with this code which was posted in November 2021.

Both the old thread version from March 2019 and the new version are used alongside a Fibonacci zone indicator. The author of the new code ClassicScott goes into great detail of how they have tested and used the indicator and posts screengrabs from TradingView.

The key difference with this code is that it allows you “to plot lines between the basis and the upper and lower bands, so, basically, splitting the upper and lower channel in half.” and there are alerts for when a candle closes across every line.

After getting to grips with How to use Donchian Channels on Thinkorswim, you can also look at How to Trade Using the Supply and Demand Indicator on Thinkorswim and How to Setup Thinkorswim Aggregation Period for Your Benefit.


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