Donchian Channel
Technical IndicatorsA trend-following indicator that plots the highest high and lowest low over a set number of periods (default 20). Breakouts above the upper channel or below the lower channel signal potential new trends.
What Is a Donchian Channel?
The Donchian Channel, created by Richard Donchian (the "father of trend following"), is the simplest channel indicator. The upper band is the highest high of the last N periods. The lower band is the lowest low. The middle line is the average of the two. Unlike Bollinger Bands or Keltner Channel, Donchian Channels only change when a new high or low is established, creating a stepped, staircase-like appearance.
The Turtle Trading System
Donchian Channels became famous through the Turtle Traders, a group trained by Richard Dennis in the 1980s. Their basic system: buy when price breaks above the 20-day Donchian Channel high, and sell when it breaks below the 20-day low. Exit long positions when price touches the 10-day low, and exit short positions at the 10-day high. This system captured massive trends in commodities and currencies and remains a benchmark for trend-following approaches.
Modern Application
For forex, a 20-period Donchian Channel on daily charts captures swing trades. A 55-period version identifies major trends. Use the channel width (upper minus lower) as a measure of Volatility: narrow channels precede breakouts, similar to Bollinger Bands squeezes. The Donchian Channel's simplicity is its strength. There is no curve fitting or optimization. If a pair makes a 20-day high, it is showing bullish momentum, period. Filter breakout signals with the Average Directional Index to avoid false breakouts during range-bound markets.
Related Terms
Keltner Channel
A volatility-based envelope indicator that plots bands above and below an exponential moving average using the Average True Range. Unlike Bollinger Bands, which use standard deviation, Keltner Channels produce smoother bands that are less prone to sudden width changes.
Bollinger Bands
A volatility indicator consisting of three lines: a middle simple moving average (typically 20-period) and upper and lower bands set at 2 standard deviations above and below it. The bands expand during high volatility and contract during low volatility.