Measure the forex market volatility

Measure the forex market volatility with Donchian Channel

The Donchian Channel is a technical indicator used to reflect market volatility. The indicator was developed by Richard Donchian. When developed the application was meant to work for the commodity market but it works equally well in the forex market for the novice and the seasoned traders alike. It is akin to the Bollinger Bands since it also has high and low bands forming a channel that contains the prices. The market volatility is captured through the calculation of recent price changes. This is done by measuring the recent high and low prices. This is where it is different from the Bollinger Bands. The BB uses the standard deviation to form the high and low bands however as opposed to this method in case of the Donchian channel the high and low price changes are used to form the bands. Traditionally green and red bands are indicated to depict high and low bands respectively.

The calculation of the bands is quite simple for the high price band the average of the highest price for ‘n’ periods is calculated and similarly for the low band the average of the lowest prices for n periods is calculated. The number of periods or ‘n’ is fixed by the user. So it is essentially a moving average indicator since the average changes for each successive period.

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