Donchian channel

The Donchian channel is an indicator used in market trading developed by Richard Donchian. 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.
A Donchian Channel is created by determining the highest and lowest point in the last X number of days. The highest point during the last X number of days marks the top of the channel and the lowest point marks the bottom of the channel. A long entry signal is given when the price breaks out to the upside and a short entry signal is given when a price breaks to the downside.

Donchian Channel

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. If a security trades above its highest n day high, then a long is established. If it trades below its lowest n day low, then a short is established.
This strategy was made famous by the Turtle Traders who used the strategy to successfully trade commodities in the 1980’s. The Turtles were a group of people that were taught to trade by Richard Dennis and William Eckhardt and then given accounts to trade. The Turtles made millions of dollars during their trading careers and many went on to manage money for other people. The Turtles’ entry strategy used either a 55 day or a 20 day Donchian Channel breakout. Using Market Analyser we can test the effectiveness of a similar strategy in the markets today.
Compiled using Wikipedia and MDSfinancial – Donchian Channel Breakout

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