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Trend-following indicator based on highest high and lowest low.
Donchian Channels plot the highest high and lowest low over a set number of periods (default 20), with a midline between them. Created by Richard Donchian — the father of trend following — this is one of the oldest and most respected breakout indicators.
Key insight: The channels represent the actual price extremes, not a statistical calculation. When price breaks above the upper channel, it's making a new high for the period. When it breaks below, a new low. This makes Donchian Channels a pure breakout system.
The famous Turtle Trading system used Donchian Channel breakouts as its primary entry signal. The simplicity is the strength — no complex math, just price doing something it hasn't done in N periods.
Upper channel breakout: Price closes above the upper band, signaling a potential new uptrend. The longer the channel period, the more significant the breakout.
Lower channel breakout: Price closes below the lower band, signaling potential downtrend. Often used for stop-loss placement or short entries.
Channel squeeze: When the upper and lower bands converge, volatility is compressing. The narrower the channel, the more explosive the eventual breakout tends to be.
This indicator works best when combined with price action analysis. Never trade indicators alone - always confirm with the chart.
Indicators confirm what price action shows. They don't replace it. Never trade based on an indicator signal alone. Always combine with chart structure, pattern recognition, and volume analysis.
The Academy teaches when to use this indicator, when to ignore it, and how to combine it for high-probability setups.
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