The Donchian Channel, developed by Richard Donchian, is a moving average indicator that can be used to track and analyze the volatility of a market price. A Donchian Channel plots a security's highest high and lowest low over the last 20 periods prior to the plotted data points. Once the high and low points are plotted on a chart, the 'channel' created between the points can be used to determine breakouts from a security's price trend.
Donchian believed that the signals derived from this type of chart could be used based on the following basic rules:
- When price closes above the Donchian Channel, buy long and cover short positions.
- When price closes below the Donchian Channel, sell short and liquidate long positions.
A Donchian Channel study only provides one interpretation of the market and does not guarantee certain results.
Upper Band = MAX (HI, n-1)
Lower Band = MIN (LO, n-1)
Middle Band = (Upper Band + Lower Band) / 2
The Donchian Channel study in ScottradeELITE use 20 bars as the default period for n.