November 5, 2017

Difference between Donchian Channel and Bollinger Band

A Donchian channel is an indicator made by plotting N days highest high and N days lowest low on a chart on the price chart.

The trading strategy is to buy the stock when stock closes above the previous N days high. A trailing SL is kept at N/2 days.

This indicator works beautifully in trending markets and tends to whipsaw a lot in rangebound market. Risk management is the key.

Here is the indicator plotted on a chart with the N set at 20 days.

Buying on close above last month's high can give similar or better results.

The kplswing indicator I have developed is similar to this ... you can read more about this here.

Bollinger Band is an indicator plotted on a price and is 2 standard deviations away from a simple moving average (usually 21 days).

Standard deviation is a mathematical formula that measures volatility, showing how the stock price can vary from its true value. By measuring price volatility, Bollinger Bands® adjust themselves to market conditions. This is what makes them so handy for traders: they can find almost all of the price data needed between the two bands.

Many traders believe the closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market.


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