DEFINITION of ‘Donchian Channels’
A Donchian Channel is an indicator formed by upper and lower bands around the price bars. The upper band marks the highest price of an issue for n periods while the lower band marks the lowest price for n periods. The area between the upper and lower bands represents the Donchian Channel. Richard Donchian, a career futures trader, developed the indicator in the mid twentieth century to help him identify trends.
BREAKING DOWN ‘Donchian Channels’
In this example, the Donchian Channel is the tan shaded area bounded by the upper green line and the lower red line, both of which use 20 days as the band construction period. As price moves up to its highest point in the last 20 days or more, the price bars “push” the green line higher and as price goes down to its lowest point in 20 days or more, the price bars “push” the red line lower. When price decreases for 20 days from a high, the green line will be horizontal and then start dropping after 20 days. Conversely, when price rises from a low for 20 days, the red line will be horizontal for 20 days and then start rising.