Donchian Channel is a trend-following indicator that determines volatility in market prices. It is created by three lines generated using moving average calculations. Developed by Richard Donchian, the Donchian Channel seeks to identify bearish and bullish extremes. Traders can combine this indicator with others like MACD or Volume Oscillator to develop their own trading strategies.
In This Article
What is the Donchian Channel?
How To Analyse Chart Using Donchian Channel
Category
Trend/ Volatility
Type
Leading & Lagging
The Donchain Channel is a combination of three lines that comprise an indicator formed by lower and upper bands around a medium band. While the upper band represents the highest price of a security over ‘n’ periods, the lower band represents the lowest price.
The average of these two bands is the mid-band and is used as a breakout indicator. Most traders use the default period of 20 days while analysing this indicator.
The lines in this indicator candlestick charts so that information supplied by the channel can be marked effortlessly. Plus, it allows traders to act on subsequent signals quickly.
You can use a Donchian Channel chart to map the momentum in an underlying market to open a long or short position at any given time.
If a stock is trading around the middle line with no strong deviations toward the lower or upper band, the market is experiencing low volatility. In this situation, there’s no clear bearish or bullish trend.
However, if the market is trending towards the upper band, traders can use it to open a long position or buy. Conversely, if the market is trending toward the lower band, traders would do the opposite and open a short position from the market, falling in value or selling.