Donchian Channel

#trendfollowing #breakout #range

Creator : Richard Donchian

Draws the highest high and the lowest low of the last N bars. Very simple: it shows the price range the market has traded in recently.

Default Period: 20.

As long as the price is higher than the price of the previous 20 periods, the upper band of the indicator will be rising. It is a bullish sign. The lower band will fall when the price is at the 20-period low, which is a bearish indication.

Price touching the upper line means a new high for the period. Price touching the lower line means a new low. Wide channel shows big range, narrow channel shows quiet market.

A middle band is calculated by averaging the highest high and the lowest low over a period of 20 periods.

The period of 20 can be changed by the user.

Useful readings:

Price breaks above upper line: New 20-bar high, buyers in control

Price breaks below lower line: New 20-bar low, sellers in control

Price stays in middle of channel: No trend, wait

Channel narrows for many bars: Tight range, breakout watch

Middle line rising: Trend up, use middle line as support

Middle line falling: Trend down, use middle line as resistance

Objective rules:

Bullish: Price closes above the previous 20-bar high.

Bearish: Price closes below the previous 20-bar low.

Classic long exit: Price closes below the 10-bar low

Classic short exit: Price closes above the 10-bar high

Trend filter: Take longs only when price is above 200 SMA, shorts only when below

What makes it unique:

Nothing simpler exists: just the highest high and lowest low, with almost nothing to over-fit. It powered the Turtle traders, proving a rule this simple can beat markets.

Click here to know more about Donchian Channel.

You can view a video on the history and usage of this indicator by clicking here.

The indicator can be found in the Indicator Digger section of TradePoint & RZone. There are ready conditions in tabular format that can be used to pick stocks based on the condition of this indicator on any charting technique.

The indicator table value in TradePoint & RZone also provides you with a list of all values of this indicator for any group of stocks. This will allow you to compare the readings of this indicator across different stocks.

This indicator is also available in the System Builder on RZone & TradePoint for all charting methods. Using the system builder, you can develop various strategies based on the different conditions already present in this indicator. Additionally, it can be used with other indicators or price patterns to develop effective trading strategies. For any group of stocks and market segments, you can scan and backtest stocks based on those strategies.

The indicator is applicable to all types of charting. It is calculated based on the number of columns on P&F charts, bricks on Renko charts, lines on Line-break charts, candles on Heikin-Ashi charts, and lines on Kagi charts. While the formula and reading of the indicators remain the same, they become more dynamic on these charts.