Donchian Channel

Written by Miroslav Marinov

Miroslav Marinov

Miroslav Marinov, a financial news editor at TradingPedia, is engaged with observing and reporting on the tendencies in the Foreign Exchange Market, as currently his focus is set on the major currencies of eight developed nations worldwide.

, | Updated: October 30, 2024

The Donchian Channel is a trend-following indicator, developed by Richard Donchian. The two outer bands are plotted through the highest high and the lowest low over a specified period, originally 20 days. A third (middle) band can optionally be plotted, as it represents the average of the two outer bands.

Within a trending environment trading signals can be generated as follows:

If the price moves above the upper band of the channel (the 4-week high if the original 20-day period is used), it is a signal to buy.

If the price moves below the lower band of the channel (the 4-week low if the original 20-day period is used), it is a signal to sell.

The main objective is to make an entry as early as possible, on a breakout, and ride the trend for as long as possible.

There is another trading approach, a variation of the Donchian system, known as Turtle trading. It was introduced by Curtis Faith in his book ”Way Of The Turtle”. The trading rules are as follows:

A trader needs to make a long entry, when the price moves above the 20-day upper bound of the Donchian channel and close his/her position, when the price breaks the 10-day lower bound of the channel.

A trader needs to make a short entry, when the price moves below the 20-day lower bound of the Donchian channel and close his/her position, when the price breaks the 10-day upper bound of the channel.

A trader may use a 25-period and a 350-period Exponential Moving Averages as a trend filter. A long position should be taken only if the 25-period EMA is above the 350-period EMA. A short position should be taken only if the 25-period EMA is below the 350-period EMA.

Chart Source: VT Trader