What it is
Richard Donchian, often called the father of trend following, used the simple idea that a market making a new high over a set number of days is likely to be trending. The channel shows that range on the chart.
The Turtle traders of the 1980s made it famous: their first system bought a break of the 20 day high and sold out on a break of the 10 day low, and their second used 55 and 20 days. The channel is flat while price stays inside the range and steps out only when a new high or low is made.
How it is calculated
Upper band: the highest high of the last 20 candles. Lower band: the lowest low of the last 20 candles. Middle line: (upper + lower) / 2. A breakout is a close above the upper band as it stood on the previous candle (or below the previous lower band).
Settings
| Setting | Default | Range | What it changes |
|---|---|---|---|
| length | 20 | 2 to 800 | How many candles the high and low are taken over. 20 suits shorter swings; 55 is the classic slower breakout. |
How to read it
How to trade it
- 1
On a 1 hour US30 chart, mark the 20 candle channel. The entry trigger is a close above the upper band.
- 2
Stop below the middle line, or 2 ATR below entry as the Turtles did. On US30 1 hour that is often 100 to 200 points; size the position so that distance is a risk you accept.
- 3
Exit when price closes below a shorter 10 candle Donchian low, which lets the trend run while cutting losers early.
- 4
On gold, the same rules on a 4 hour chart catch the larger trends; expect several small losses between the trends that pay.
A close back inside the channel and below the middle line within a few candles of the breakout cancels it. A close below the 10 candle low closes the trade either way.
On WickSpeak, the Donchian Channel writes a plain-English reading on the live candle: how close price is to the top or bottom of the channel, how to trade a break and what would prove it wrong. In Playbook you can test: price closes above the upper band, price closes below the lower band, price is inside the bands, price is above it, or price is below it. A Donchian breakout with a stop in ATR multiples and an ATR trailing stop can be built and backtested without code.
Best markets and timeframes
Works on markets that trend in long runs: gold, US30, NAS100 and trending forex pairs, on 1 hour to daily charts. On 1 to 5 minute charts most breakouts of a 20 candle range fail, so it needs a filter there.
Common mistakes
- Entering on a wick through the band instead of waiting for the close.
- Expecting a high hit rate. Breakout systems lose often and rely on a few big trends.
- Exiting at the opposite 20 candle band, which gives back too much; a shorter exit channel is the classic answer.
Works well with
Questions traders ask
What is the Donchian Channel strategy?
Buy when price closes above the highest high of the last 20 candles, sell short below the lowest low, and exit on a break of a shorter opposite channel such as 10 candles. Stops are often set at 2 ATR. It aims to catch trends and accepts many small losses.
What is the difference between Donchian and Bollinger?
Donchian uses the actual highest high and lowest low, so its bands are flat steps. Bollinger uses an average plus a measure of spread, so its bands curve. Donchian marks real price levels; Bollinger marks statistical distance.
What did the Turtle traders use?
System 1 bought a 20 day breakout and exited on a 10 day low; System 2 bought a 55 day breakout and exited on a 20 day low. Position size was set from the 20 day ATR.
What length should I use for a Donchian Channel?
20 is the standard. Use 55 for slower trends with fewer trades, or 10 for short term swings. Match the exit channel to roughly half the entry length.