Donchian Channels are one of the oldest and most reliable technical indicators for trend following and breakout trading. Created by Richard Donchian, the father of trend following, these channels form the foundation of the famous Turtle Trading system and remain a powerful tool for identifying high-probability breakout trades.
What are Donchian Channels?
Donchian Channels consist of three lines based on recent price extremes:
- Upper Band: Highest high over the past N periods
- Lower Band: Lowest low over the past N periods
- Middle Band: Average of upper and lower bands
Key concept: Unlike Bollinger Bands or Keltner Channels, Donchian Channels are based purely on price extremes, not volatility measures. A new high breaks the upper channel, a new low breaks the lower channel - simple and mechanical.
Donchian Channel Calculation
The calculation is straightforward:
Upper Channel
- Upper Band = Highest High over last 20 periods
Lower Channel
- Lower Band = Lowest Low over last 20 periods
Middle Channel
- Middle Band = (Upper Band + Lower Band) / 2
Calculation Example
Over the last 20 trading days:
Highest high: $55
Lowest low: $45
Upper Channel = $55
Lower Channel = $45
Middle Channel = ($55 + $45) / 2 = $50
A close above $55 signals a new 20-day high breakout.
The Turtle Trading System
The famous Turtle Trading experiment used Donchian Channels as its core entry mechanism:
Original Turtle Rules
- Entry: Buy on 20-day high breakout, sell on 20-day low breakdown
- Exit: Exit longs on 10-day low, exit shorts on 10-day high
- Position sizing: Based on ATR for volatility adjustment
System 2 (Long-term)
- Entry: 55-day channel breakout
- Exit: 20-day opposite channel breakout
Donchian Channel Trading Strategies
1. Classic Breakout Strategy
The most straightforward application:
- Long entry: Price closes above the upper channel
- Short entry: Price closes below the lower channel
- Use a shorter-period channel for exits
Breakout Trade Example
Stock XYZ has been consolidating between $48 and $52 for three weeks.
The 20-day Donchian upper channel is at $52.
Price closes at $53, breaking the upper channel.
Enter long with stop at the 10-day low ($49).
Exit when price closes below the 10-day Donchian lower channel.
2. Channel Width Analysis
Use channel width to gauge volatility:
- Narrow channels: Low volatility, consolidation, breakout pending
- Wide channels: High volatility, trending market
- Breakouts from narrow channels often produce larger moves
3. Pullback Entry Strategy
For more conservative entries:
- Wait for an initial channel breakout
- Let price pull back to the middle line or previous resistance
- Enter on the pullback with better risk/reward
4. Multiple Timeframe Strategy
Combine different channel periods:
- Use 55-day channels for major trend direction
- Use 20-day channels for entry signals
- Only take 20-day breakouts in the direction of 55-day trend
Donchian Channel Exit Strategies
Opposite Channel Exit
- Exit longs when price touches the lower channel
- Exit shorts when price touches the upper channel
- Simple but can give back significant profits in volatile markets
Shorter Period Exit
- Enter on 20-day breakout, exit on 10-day opposite breakout
- Tighter exits capture more profit but may exit good trades early
Middle Line Exit
- Exit when price crosses below the middle line
- More responsive than waiting for opposite channel
Donchian Channels vs Other Channel Indicators
Donchian vs Bollinger Bands
- Donchian: Based on actual price extremes
- Bollinger: Based on standard deviation from moving average
- Donchian better for breakout trading, Bollinger better for mean reversion
Donchian vs Keltner Channels
- Donchian: Hard price levels (actual highs and lows)
- Keltner: ATR-based envelopes around EMA
- Donchian provides clearer breakout signals
Position Sizing with Donchian Channels
The Turtle system used ATR-based position sizing:
- Calculate position size based on account risk and ATR
- Larger positions in low-volatility markets
- Smaller positions in high-volatility markets
- This normalizes risk across different instruments
Combining Donchian Channels with Other Tools
Donchian + Volume
- Breakouts on high volume are more reliable
- Low volume breakouts may be false signals
Donchian + ADX
- ADX above 25 confirms trending conditions
- Take Donchian breakouts when ADX is rising
Donchian + Moving Averages
- Only take long breakouts when price is above 200 MA
- Only take short breakouts when price is below 200 MA
Donchian Channel Settings
- 20 periods: Standard, good for swing trading
- 10 periods: More sensitive, more signals, more whipsaws
- 55 periods: Long-term trend following, fewer but larger moves
Common Donchian Channel Mistakes
- Abandoning the system after a few losing trades (whipsaws are normal)
- Not using proper position sizing
- Fighting the trend when price stays at channel extremes
- Using Donchian Channels in choppy, range-bound markets
Track Your Breakout Trades
Pro Trader Dashboard helps you analyze which channel breakout setups work best for your trading style.
Summary
Donchian Channels provide a simple, mechanical approach to breakout trading that has stood the test of time. By trading breaks of recent price extremes, traders can catch major trend moves while limiting downside with systematic exits. The indicator works best in trending markets and requires discipline to follow through the inevitable whipsaw periods. Combine Donchian Channels with volume analysis, trend filters, and proper position sizing for a complete trading system.
Learn more: Keltner Channels and Bollinger Bands.