The Donchian Channel is a trend indicator that was developed by futures trader ‘Richard Donchian’. He would later be nicknamed "The Father of Trend Following". Several trading strategies have been developed based on Donchian Channels, yet day traders may also come up with their own strategies as the indicator is versatile and can be interpreted in different ways. Variation of the Donchian system was used by the legendary Turtle Traders.
What is an ‘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 to provide signals for long and short positions. Donchian Channels are three lines generated by moving average calculations that comprise an indicator formed by upper and lower bands around a mid-range or median band.
The upper band marks the highest price of a security over N periods while the lower band marks the lowest price of a security over N periods. The area between the upper and lower bands represents the Donchian Channel.