A channel based on the highs and lows of n-periods used in breakout trading approaches.
Overview
The Donchian Channel is a very simple trend-following indicator developed by Richard Donchian. It plots the highs and lows of a give period, on default 20. The reason it was 20 is because it was made originally to look at daily charts of stocks, and 20 days is about a month. The idea was that if the price breaks the high from a month ago, it is bullish, and if it can break the lows of a month ago, it is bearish. If the breakout is in the direction of the trend, it is confirming. If it is against the trend it suggests reversal.
The Donchian Channel on the USD/CAD 4H chart 4/12/2011
Source: VT Trader
Calculation:
Upper Band = Highest(H1, H2, H3, H4, … Hn)
Lower Band = Lowest(L1, L2, L3, L4, … Ln)
Trading signals are as follows:
1. When price closes above the Donchian Channel, buy long and cover short positions.
2. When price closes below the Donchian Channel, sell short and liquidate long positions.
