How I used Donchian Channel to sell USDINR options and make 45% return in a year
Before I tell you my strategy on trading USDINR using Donchian Channel. Let me give you some brief introduction regarding this fantastic technical indicator.
I first came to know about Donchian Channel Indicator when I read the book
Trend Following: How to Make a Fortune in Bull, Bear, and Black Swan Markets by Michael W. Covel
Richard Donchian created Donchian Channel. His pioneering work led to the founding of the Turtle trading system, and the community was known as Turtle traders. The Turtle trading community used this indicator mainly for trend following.
This indicator is still used by many who are trend followers and is used mostly in futures derivative trading.
Donchian Channel is an indicator which has a channel with the upper band, lower band and a median line. The upper band denotes 20 periods High, while the lower band denotes 20 periods Low. The median line indicates the average of the upper band and lower band.
So far, I have not heard anyone using it to sell options, or this indicator working in all types of markets, i.e., uptrend, downtrend, consolidating market. It’s not that this indicator is perfect. Just like any other indicator, it also fails at times and may not work for other financial assets.
When I first heard about this indicator, I decided to explore everything about it and also everything about trend following. Trend following works perfectly well in more mature and broader markets that too with selective assets in today’s world. In the Indian context, it’s difficult to use this indicator with every asset available for trading. It might work well for some stocks as the majority of the people trade in stocks, indices (futures and options) so its applicability might be in some of the selective stocks. I have not explored in depth but did an in-depth analysis regarding the trend following with Currency Derivative Segment.
At first, I tried to study using the Futures (I traded very less because I was not confident at all with this indicator at the beginning). It didn’t work very well on paper trade with the available currency pairs. It showed good results on more extended Time frames for USDINR pair only, for other three pairs results were not satisfactory. It would be a disaster if I were to be long or short on USDINR pair for months contract in advance. In the major markets (US, Europe, UK, HKG, Japan) there is a quite high volume, and people trade with futures contracts expiring in 1 month to 12-month time frame. In India, the trade volume is quite less as compared to these major markets and the majority of the people trade only in the current month futures contract, and very few would be trading in the futures contract expiring within the next 2–12 months time frame.
Thus this indicator will fail for less volume in futures contracts expiring in next 2–3 months and also Indian currency is pegged with crude oil. Therefore crude oil prices and Fed rate decisions severely impact the movement of USDINR. Daily volatility and liquidity are other issues for this indicator to fail.
I had done options trading but not on a larger scale. I used to sell options but not regularly until I read somewhere an article regarding option selling. My interest was also piqued when I watched a few videos of Trader’s carnival on youtube. I watched the videos of PR Sundar, Jegan and learned that option selling is the place where the majority of the institutions, big banks make cash.
So around November 2018, after watching the videos, I started selling options. But again my dilemma was that majority of the technical indicators and analysis were for futures and stocks. It was difficult for me to explore technical analysis only for options selling and also the indicators that would help me in setting up my trade.
In the beginning, I made good money by selling options. I sold far OTM options to collect the premium. The excellent run continued 2–3 months. But after 2–3 months I started to lose because the trend had reversed and I didn’t know which indicator or thorough analysis would help me. I learned about the Donchian channel around February or March of 2019. At the same time, I also learned the more effective way of trading, and that was Price-Action based on volume. I grasped both the trading styles and did random experiments with them.
Note: These indicators and technical analysis were meant for Futures trade or plain stocks trading.
I just learned to use both of them to sell options. Also, I combined DC and Price-Action to sell options. In the case of currency derivatives since volumes are already low in the Indian market; hence in price-action theory volume will not be valid.
Scenario 1 : When markets are consolidating
I would be selling any option which is above the upper band of the DC and below the lower band. I didn’t trade on the options whose strike price fell within the band region. The upper band with flat region gave me the resistance and the lower band with flat region gave me the support. The upper band with the more flat line also acted as a stop loss, whereas lower band with the more flat line also acted as stop loss. This indicator itself provided me with support and resistance, including stop-loss for my trade. Thus this indicator can also be considered as a price-action indicator.
In consolidating market you can easily sell options on both sides of the band and works effectively in this market as well.
Futures can also be traded whenever the prices hit the upper band sell future contract and whenever prices hit the lower band go long on the future.
Scenario 2 : When Markets are in uptrend
When breakout is about to happen you will start to get crystal clear indication on the charts. If you are beginner then you can also use MACD indicator for analysis of volume and study how macd lines are forming. If the formation has started to become very small with volume thinning out then it means that breakout is about to happen on either side.
In this case it is easy to sell otm put options and long the future. Then this indicator works perfectly for trend following in upward direction.
Scenario 3: When markets are in downtrend
In this case you have to do exactly opposite of what you did in scenario 2, i.e., you have to sell otm calls and go short on futures.
Once I had devised the plan to use this indicator, I started in one account with only Rs 23800 and sold options every month. I would be selling put options below the support zone each time (Would explain why sold only otm puts throughout the year in some other article). In one year, I had made a 45% return on the invested capital. Since this was an experimental setup, I had started only with smaller capital which was nothing but the margin required to sell ten lots of USDINR options at that time. Due to so many failures in my early trading career, I learned to be patient and also learned the art to make small profits and compound it. This experiment taught me a lot to control my trades and my impulsive behavior. The earning grew very slowly, and now this model earns me around 1500 INR per month. I also experimented with my other two accounts there I generate around 20–25K per month.
Any feedback, correction, suggestion is welcome.
