Basics chart analysis 2/3

The donchian channel
The donchian channel was named after his inventor, the economist Richard Davoud Donchian, who first named such a channel in the article “High finance in Copper” in the “Financial Analyst Journal”.

At this point, I will just cite wikipedia, as the explanation is quite good:

“[The donchian channel] is formed by taking the highest high and the lowest low of the last n periods. The area between the high and the low is the channel for the period chosen. […] If a [good] trades above its highest n periods high, then a long is established. If it trades below its lowest n periods low, then a short is established.”

(For everyone who is not accustomed to the terminology: you can read “going short” as “selling” and “long” for “buying”, then it should make a bit more sense.)

Transfered to EVE, this means if we connect the highest prices and the lowest prices of the last 100 days, we will create an area which is called the “donchian channel”. Easy, right?

Right now, the donchian channel is shown as a grey area – I highlighted it a bit on the right side… dont judge my paint-skills, please

Now we have the donchian channel and the question is, how we can use it in our decision-process in regard on how, when and what we trade.

First it is important to say, that the donchian channel is an indicator for the stability of the price of a good. In EVE as well as in reality, this means that a “small” donchian channel is a sign of a more stable good, while a “wide” donchian channel means that the price of the good is way more volatile, the prices have a higher fluctuating. If you e.g. are more into stationtrading, a wider donchian channel is a bit more primissing, as there may be a higher spread between buying and selling, meaning that your profit from pure arbitrage-trading is better. But for this, it would be better to use the “minimum/maximum”, as the donchian channel in EVE is not real-time but delayed by 5 days. If it reaches a new high/low, it uses the actual number, otherwise it will only change if 5 days pass.

In the case of EVE, I need to say that the analysis of the donchian channel comes to a kind of an end. While it is still in use in real life (I wont dive into the discussion if this is adviseable or not) for the analysis of trends or for the exact point in time, when to leave or enter the market. Basically, it is used like this:

  • buy, if the moving average (5 or 20 day is a case-to-case – decision) reaches the top of the donchian channel and
  • sell, if the graph reaches the bottom

This sounds a bit strange at first: buying when the graph reaches an high and selling if it reaches a low. But we need to take into account that the donchian channel is there to measure trends. “Trend” means that the price is rising of falling over a period of time and we use this information to sell our product in the future at a higher price than we bought it for. It is a classical investment, which means buying –> holding –> selling and not an arbitrage activity, which utilize more the difference of price at the same time, like we do in the classical stationtrading.

But EVE is still a game and the margins as well as the volatility of the goods we trade with are rarely shown in real markets (highly speculative exceptions aside) in the amount and time. Every patch, every change in the meta influences a good and can either let it skyrocket or fall down like a stone. Of course, this can also happen in reality, but here the conditions are fundamentally different. A market in real life can go down as a whole (last seen in the financial crisis 2007/2008), as there are many complex interdependencies and connections (state politics, securities, mentality, regulations on a local as well as on a international level etc.) between all participants on the market. In EVE, there is no such event as all markets going south as a whole, but only single products or at most a couple of groups of products, as the connections between these products are more known, less influenced by these interdependencies and most of all: known to everybody. As long as you have no stockpile, ridiculus amounts of a good or a monopoly (like the CFC did with technetium some years ago), it is hard for you to influence something in the long run. One way would be of course manipulation of the crowd via e.g. faking a news from CCP on twitter, but this falls more on the section of scamming and does not require analysis of financial tools like the ones we talk about here.

Anyway, I start to digress. Investment in EVE is also working different from investments in RL in the first place. While in RL you rely on instruments like the donchian channel and in some cases advisory from e.g. scientists who are working in this field, this role is mainly distributed to patches and their conclusions. One example for this is Salvage. Compared to the price of last year, the prices of salvage went bonkers and will most likely rise up even more in the future. The reason is simply logic. Because CCP has announced to remove the POS-system a long time ago. Producing then is only possible on Citadels and Engineering Complexes. But Citadels and Complexes need Rigs, just like a ship. And Rigs need a huge amount of salvage – the bigger they are, the more salvage they need. There is no need for a donchian channel to know that the prices for salvage will rise up a bit more during this year and even more when the point in time when POSes will be obsolete is finaly public. Same goes for Meta-4-Items and any POS-Module which is unprofitable to produce right now, as the payment CCP gives out for these modules might be oriented on the resources needed to build them.

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