Donchian Channel is a channel (indicator) superimposed on a price chart and is used by technical analysts to help predict future price or market action. The Donchian Channel was developed by Richard Donchian
Donchian Channel is a channel (indicator) superimposed on a price chart and is used by technical analysts to help predict future price or market action. The Donchian Channel was developed by Richard Donchian for trading commodities and is commonly available on most charting programs.
Donchian Channel Calculation
The Donchian Channel is defined by two lines on the price chart: one line marking the highest highs and another line marking the lowest low over the last n periods.
One line appears above the market price, while the second line below the market price. Richard Donchian originally used a period of 4 weeks or 20 days.
Donchian Channel Interpretation
The Donchian Channel is generally used to generate long and short trading signals in the commodities markets. When the commodity price pierces the upper channel line, a long position should be established. When the lower channel line is breached then a short position should be established. Using this strategy for long/short requires a great deal of discipline as it is subject to significant whipsaw. Traders tend to experience many small losses before realizing a large gain.
The Donchian Channel is also useful as a visual indicator for price volatility. When the channel is narrow the commodity price is consolidating. When the channel is wide the price is fast moving. Prices often alternate between low and high volatility and some traders use periods of low volatility to position themselves for the next large move.