Donchian Channel

What

The Donchian channel is a useful indicator for seeing the volatility of a market price. If a price is stable the Donchian channel will be relatively narrow. If the price fluctuates a lot the Donchian channel will be wider. Its primary use, however, is for providing signals for long and short positions.

How

It is formed by taking the highest high of the daily maxima and the lowest low of the daily minima of the last ‘n‘ days, then marking the area between those values on a chart.

HIGH = Highest (H1, H2, H3, H4, ... Hn)

LOW = Lowest (L1, L2, L3, L4, ... Ln)

When

The Donchian Channel is a simple trend-following breakout system. The signals derived from this system are based on the following basic rules:

1. When price closes above the Donchian Channel, buy long and cover short positions.

2. When price closes below the Donchian Channel, sell short and liquidate long positions.

Donchian channels are not usually smoothed, so they react immediately to changes in the highest high and lowest low. This means that prices will rarely be outside a donchian channel, even during a break out of a price range, because the donchian channel will move to the new high or low on the next bar or candlestick.