Donchian Channel

Donchian Channels, developed by Richard Donchian (the "father of trend following"), are a straightforward yet powerful technical indicator consisting of three lines: the upper band (the highest high over a specified lookback period), the lower band (the lowest low over the same period), and the middle band (the average of the upper and lower bands). The default lookback period is 20 days, based on the approximate number of trading days in a month. The interpretation is simple but effective: when price breaks above the upper channel, it signals a potential new uptrend and generates a buy signal. When price breaks below the lower channel, it signals a potential new downtrend and generates a sell or short signal. This breakout methodology formed the basis of the famous "Turtle Trading" system used by Richard Dennis and William Eckhardt in the 1980s, where traders entered long positions on 20-day high breakouts and short positions on 20-day low breakouts, with 10-day channels used for exits. The channel width (distance between upper and lower bands) also serves as a volatility measure — wider channels indicate higher volatility, while narrower channels suggest consolidation and potential upcoming breakouts. Donchian Channels work best in trending markets and can produce false signals in range-bound environments.