Donchian Channels

Donchian channels, from Richard Donchian, are the trailing range. The upper line is the highest high the window has seen. The lower line is the lowest low. There is no average and no standard deviation. A break of the upper line is a new N-bar high. A break of the lower line is a new N-bar low. That simplicity is the product.

A short N hugs price and breaks often. A long N breaks rarely and only when the market does something it has not done for a long time. The turtle traders popularised buying a 20-day breakout and using a longer window as a filter. The channel itself is just the high and the low.

A close through the upper channel is the breakout long. The lower channel, or a shorter exit channel, can be the trailing stop. You are buying strength. In a range you will buy the high and get stopped at the low. That losing pattern is the cost of the system.

A close through the lower channel is the breakout short. Same cost in a range. Donchian does not know whether the market is ranging. You filter that elsewhere, or you accept the whipsaws as the price of catching the trend.

Fading the Donchian band as if it were a Bollinger band. The upper Donchian line is a high, not an overbought calculation. Fading it is fading a breakout.

The channel is discontinuous. When an old spike falls out of the window, the line can jump even if today's price did nothing. Know the window or the jump will look like a signal.