Donchian Channels are one of the oldest and most respected technical indicators in trading. Created by Richard Donchian, the "father of trend following," this indicator became famous through the Turtle Trading experiment and remains a powerful tool for breakout traders today.
What Are Donchian Channels?
Donchian Channels consist of three lines that plot the highest high and lowest low over a specified period, with a middle line showing the average. Unlike other channel indicators, Donchian Channels use pure price action without any mathematical smoothing.
Key concept: Donchian Channels show the trading range over a set number of periods. When price breaks above the upper channel, it is making a new high. When it breaks below the lower channel, it is making a new low.
Donchian Channel Calculation
The calculation is straightforward:
Upper Channel
- Upper Channel = Highest high of the last N periods
Lower Channel
- Lower Channel = Lowest low of the last N periods
Middle Line
- Middle Line = (Upper Channel + Lower Channel) / 2
Calculation Example
Using a 20-period Donchian Channel on Stock XYZ:
Highest high in last 20 days: $55
Lowest low in last 20 days: $45
Upper Channel = $55
Lower Channel = $45
Middle Line = ($55 + $45) / 2 = $50
The Turtle Trading System
The most famous application of Donchian Channels came from the Turtle Trading experiment in the 1980s. Richard Dennis proved that trading could be taught by training novice traders using specific rules based on Donchian Channels.
Original Turtle Rules
- Entry (System 1): Buy on 20-day high breakout, sell on 20-day low breakout
- Entry (System 2): Buy on 55-day high breakout, sell on 55-day low breakout
- Exit: Exit long on 10-day low, exit short on 10-day high
- Position sizing: Based on ATR for volatility-adjusted risk
Donchian Channel Trading Strategies
1. Classic Breakout Strategy
The simplest and most direct approach:
- Buy signal: Price closes above the upper channel
- Sell signal: Price closes below the lower channel
- Stop loss: Opposite channel or middle line
- Trend filter: Only trade in the direction of the longer-term trend
Breakout Trade Example
Stock ABC 20-day Donchian Channel: Upper $100, Lower $90
Price breaks above $100 on strong volume.
Enter long at $100.50 with stop at $95 (middle line).
Trail stop using the 10-day low or middle line.
Exit when price closes below the 10-day low.
2. Pullback Entry Strategy
Wait for a breakout, then enter on a pullback:
- Price breaks above the upper channel (confirms strength)
- Wait for price to pull back to the middle line
- Enter long when price bounces from the middle line
- Stop below the recent swing low
3. Middle Line Strategy
Use the middle line as a trend filter:
- Bullish bias: Price above the middle line
- Bearish bias: Price below the middle line
- Only take long trades above the middle line
- Only take short trades below the middle line
4. Dual Timeframe Strategy
Combine multiple Donchian Channel periods:
- Use 55-period channel for trend direction
- Use 20-period channel for entry signals
- Only enter trades in the direction of the longer-term channel
Donchian Channel Settings
Common Periods
- 20 periods: Standard setting, good for swing trading
- 10 periods: More sensitive, better for short-term trading
- 55 periods: Longer-term trends, fewer signals
- 5 periods: Very short-term, good for exits
Timeframe Considerations
- Daily charts: 20-period = 1 trading month
- Weekly charts: 20-period = about 5 months
- Intraday: Adjust periods based on your trading session
Channel Width Analysis
Wide Channels
- Indicate high volatility
- Larger potential profits and losses
- May suggest strong trending market
- Require wider stops
Narrow Channels
- Indicate low volatility (consolidation)
- Often precede significant breakouts
- Tighter stops possible
- Watch for expansion as signals
Combining Donchian Channels with Other Indicators
Donchian + ATR
- Use ATR for position sizing
- Set stops at 2x ATR from entry
- This was a key component of Turtle Trading
Donchian + Moving Averages
- Use 200 MA as trend filter
- Only take breakouts in MA direction
- Middle line acts similar to a moving average
Donchian + Volume
- Breakouts should occur on above-average volume
- Low volume breakouts often fail
- Increasing volume confirms trend strength
Donchian + RSI
- Avoid breakouts when RSI is extremely overbought/oversold
- Look for RSI confirmation of momentum
- RSI divergence at channel extremes warns of reversals
Advantages of Donchian Channels
- Simplicity: Easy to understand and implement
- Objectivity: Clear, rule-based signals
- No lag: Based on actual highs and lows, not averages
- Trend following: Naturally captures major moves
- Versatility: Works on any timeframe and market
Limitations and Challenges
- Whipsaws: Ranging markets produce many false signals
- Late entries: You enter after the move has started
- Drawdowns: Trend following has periods of losses
- No prediction: Shows current range, not future direction
Common Donchian Channel Mistakes
- Trading every breakout without trend context
- Not waiting for candle close confirmation
- Using stops that are too tight
- Abandoning the strategy during drawdown periods
- Ignoring volume on breakouts
Donchian Channels vs Other Indicators
vs Bollinger Bands
- Donchian uses highs/lows; Bollinger uses standard deviation
- Donchian channels are more stable
- Bollinger adapts faster to volatility changes
vs Keltner Channels
- Keltner uses ATR and EMA; Donchian uses price extremes
- Keltner is smoother; Donchian is more reactive
- Donchian provides clearer breakout levels
Track Your Breakout Trades
Pro Trader Dashboard helps you analyze your Donchian Channel and breakout trading performance. Track win rates, average profits, and identify your best setups.
Summary
Donchian Channels remain one of the most effective tools for breakout trading. Their simplicity and objectivity make them ideal for systematic trading approaches. While they work best in trending markets, combining them with filters like the middle line, volume analysis, or trend indicators can improve results. The Turtle Trading experiment proved that a disciplined approach using Donchian Channels can be highly profitable over time.
Continue learning: Keltner Channels Guide and Bollinger Bands Guide.