Donchian channel

The Donchian channel was invented by a trader called Richard Donchian. The two bands of the channel are based on the highest high and the lowest low of a set period. Donchian himself based both channel bands on the highest high and the lowest low of the last 20 days. Donchian would consider opening a long position when the market price goes above the 20-day channel. Alternatively, he would consider opening a short sell position when the market price goes below the 20-day channel.

Another trader, Curtis Faith, who worked on the Turtle Trading system, uses fairly similar values for the two bands. In the case of Faith he opens a position when the market price crosses a 20-day channel. He then, however, uses a 10-day channel as his stop. The Donchian channel is also used by German trader Birger Schäfermeier for closing positions.

This example shows a Donchian channel with both bands based on 20-day periods.

 

This example is the same chart as above. It shows, however, a Donchian channel with the upper band based on a 20-day period and the lower band based on a 10-day period. Some traders would open a long position (if the underlying trend is bullish) when the market crosses above the upper band and they would use the lower 10-day band as stop.