Overlays · Indicator
Donchian Channels plot the highest high and lowest low over a lookback period, marking the boundaries a breakout must clear.
Overview
Donchian Channels plot the highest high and the lowest low over a lookback period, plus a midline halfway between them. A Richard Donchian classic, the indicator makes no attempt to average or smooth anything: it simply marks the extremes of the recent range. Closes above the upper band signal upside breakouts and closes below signal downside breakouts, which is about as direct a definition of a breakout as technical analysis offers.
That simplicity is the point. Because the bands are literal price extremes rather than statistical constructions, they correspond to levels other participants can see on a bare chart, and a break of a 20-day high is a fact rather than an interpretation. The channel was the core of several well-known trend-following systems, most famously the rules taught to the Turtle traders, which used a shorter channel for exits than for entries.
The channel is asymmetric in how it moves. It expands instantly when a new extreme is set, since that extreme becomes the band on the same bar, but it contracts only when an old extreme falls out of the lookback window. This produces the characteristic stair-step shape, with long flat stretches punctuated by sudden jumps.
How it is calculated
For each bar, the upper band is the highest high over the last N bars and the lower band is the lowest low over the same window. The basis is the arithmetic midpoint of the two, which serves as a rough centre of the recent range.
There is no smoothing and no weighting. Because the bands use highs and lows rather than closes, they include wicks, so a single spike sets the band for the whole lookback window.
Upper = highest high over the last N bars Lower = lowest low over the last N bars Basis = (Upper + Lower) / 2
Inputs
How to read it
The two bands are the levels that define the current range, so the first question is whether price is inside them or breaking one. Price working within a flat channel describes consolidation, and the width of that channel tells you how much room the consolidation has before a break becomes meaningful.
Channel width is a volatility read in its own right. A narrow channel means the last N bars have all traded within a small range, which is the same compression that squeeze indicators look for. A wide channel means the recent past contains at least one large move, and breaking it requires substantially more effort.
The stair-step behaviour carries information about trend health. In a strong uptrend the upper band steps higher repeatedly while the lower band stays flat, showing new highs without corresponding new lows. When both bands stop moving, the trend has stalled regardless of what price does inside the channel.
Signals to look for
A close above the upper band or below the lower band is the indicator's core signal, marking a new extreme for the lookback period. Trend-following systems have historically used this as a mechanical entry.
Classic systems enter on a long-lookback break and exit on an opposite break of a shorter channel, for example entering on a 55-bar high and exiting on a 20-bar low, which keeps exits tighter than entries.
The upper and lower bands converging into a narrow channel marks a period where price has traded in a tight range for the whole lookback, and is watched as a setup for an expansion in either direction.
Price clearing a band and then closing back inside the channel is read as a failed break. These are common enough that many traders require a second confirming close before treating a break as valid.
Limitations
Frequently asked questions
Donchian Channels plot the highest high and lowest low over a lookback period, marking the boundaries a breakout must clear.
The two bands are the levels that define the current range, so the first question is whether price is inside them or breaking one. Price working within a flat channel describes consolidation, and the width of that channel tells you how much room the consolidation has before a break becomes meaningful.
Channel breakout: A close above the upper band or below the lower band is the indicator's core signal, marking a new extreme for the lookback period. Trend-following systems have historically used this as a mechanical entry.
Most breakouts fail. Trend-following systems built on Donchian breaks historically won on a minority of trades and relied on a few very large winners to be profitable overall, which is a difficult profile to trade.
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