The Donchian channel is a simple trend-following breakout system developed by Richard Donchian. The outer bands are plotted as the highest high and lowest low for a set period. The area between the high and the low is the channel for the period chosen.
- The upper band is calculated as the highest high for the selected period.
- The lower band is calculated as the lowest low for the selected period.
- The selected period excludes the day on which the band is plotted. i.e. the 20-day Donchian channels are for the highest high and lowest low of the preceding 20 days.
Trading with Donchian channels
Donchian channels should be used in trending markets. Traders should look to go long when the price breaches the upper channel. Short positions would be established on a downward move through the lower channel.