What is the Donchian channel indicator?
The Donchian channel indicator is a moving average indicator which uses the lowest low and highest high of the past chosen period e.g. past 20 days to create two channels. The upper is the highest price of x periods, the lower band is the lowest price of the last x periods, the centre line is the average of the two. The Donchian channel indicator is a popular indicator for measuring market volatility, similar to Bollinger bands when the channels widen this indicates high volatility and when the channel narrows this indicates low volatility. Donchian channels can also be used to indicate trending markets, when the price is at the lower channel this indicates a downtrend and when at the upper band this indicates an uptrend.
How is the Donchian channel indicator calculated?
The calculation of the donchian channel indicator is one of the simplest calculated indicators.
The upper channel = 20 day high
The lower channel = 20 day low
The middle channel = ( 20 day high + 20 day low ) divided by 2
This is when using the 20 day period for your indicator, this can be changed to 20 1hr periods when using hourly chart or 20 15 min periods when using 15min charts ect, you can also adjust the number of periods from 20 to any other number.
How to trade the Donchian channel indicator
To trade using the Donchian channel indicator it is best to use it to identify a trend then follow the trend into profit. When the price hits the lower band this is and indication that a downtrend is forming and is a good time to sell, the opposite happens when the price hits the upper band as this indicates a potential uptrend and is a good indication to buy. You can also use the donchian indicator to exit a trade either buy exiting when the price crosses the centre moving average or when the price hits the opposing band.