Trading Defined
Indicators and ToolsBeginner

Donchian Channels

Donchian Channels plot the highest high and lowest low over a set number of periods, usually 20, with a midline between them. A close above the upper band signals a breakout; the Turtle traders famously used them for trend-following entries.

Donchian Channels may be the simplest indicator there is: just the highest high and lowest low of the last N periods. Yet that simplicity powered some of the most famous trend-following systems ever built. This entry explains how the channels are drawn, how breakout traders use them and where they fail.

Category
Indicators and Tools
Reading time
3 min
Also called
Donchian Channel, Price Channels, Price Channel indicator
Updated

Donchian Channels in plain words

The upper channel sits at the highest high of the last x periods and the lower channel at the lowest low; for a 20-day channel these are the 20-day high and low.1

The midline is halfway between them, and the indicator was developed by Richard Donchian.1

The Turtle Trading system opened trades on price channel breakouts of this kind, using 20- and 55-day highs.2

How Donchian Channels work, step by step

  1. Choose a look-back

    20 periods is the common default.

  2. Upper band

    The highest high over that period.

  3. Lower band

    The lowest low over that period.

  4. Midline

    (Upper + lower) ÷ 2.

  5. Watch for breaks

    A new high pushes the upper band up. See Breakout Trading.

  6. Exit on the other side

    Many systems exit on a shorter-period opposite break. See Trailing Stop.

Worked examples

Example 1 — Reading the channel

Range $72–$84

Over the last 20 days the highest high is $84 and the lowest low is $72.

Example 1 — Reading the channel — calculation
Upper band$84
Lower band$72
Midline($84 + $72) ÷ 2 = $78

The centreline is the midpoint between the two channel lines.1

Example 2 — A breakout trade

+$8

Price closes at $85, above the 20-day high of $84. You buy and later exit at $93.

Example 2 — A breakout trade — calculation
Entry$85
Exit$93
Gain+$8 a share

Upward thrusts through the channel can signal the start of an uptrend.1

Example 3 — A false breakout

−$3.50

Price closes at $84.50 above the band, then falls back to $80 within days. Stop at $81.

Example 3 — A false breakout — calculation
Entry$84.50
Stop hit$81
Loss−$3.50 a share

Breakout systems accept many small losses like this in exchange for occasional large trends. See Breakout.

Donchian vs Keltner Channels

AspectDonchianKeltner
Bands fromHighest high / lowest lowEMA ± ATR
ShapeStep-likeSmooth
Main useBreakoutsTrend and volatility
Famous userTurtle tradersSee Keltner Channels

How traders use Donchian Channels

  • Breakout entries

    Buy new highs, sell new lows. See Trend Following.

  • Trailing exits

    A shorter channel as a moving stop.

  • Overbought and oversold

    Within a bigger trend.1

  • Any time frame

    Intraday, daily, weekly or monthly charts.1

Advantages and disadvantages

Advantages

  • Extremely simple and objective.
  • Built for catching big trends.
  • Easy to code and backtest.

Disadvantages

  • Many false breakouts in ranges.
  • Late entries and exits.
  • Wide stops on volatile assets.

Going deeper

Read as far as you need. Each level builds on the one before it.

Changing the look-back

Beginner

The 20-period setting can be shortened or lengthened: shorter channels react faster, longer ones filter more noise.1

The Turtle experiment

Intermediate

In 1983 Richard Dennis bet that he could teach novices to trade; his "Turtles" used a mechanical trend-following system based on 20- and 55-day highs.2 See Turtle Trading System.

Win rate vs payoff

Advanced

Channel breakout systems often win less than half the time but make money because winners are much bigger than losers. See Expectancy.

Common mistakes

  1. Trading breakouts in ranges

    Sideways markets produce many false signals.

  2. Quitting after a losing streak

    Trend systems need the rare big winner.

  3. Oversizing

    Wide channels need smaller positions. See Position Sizing.

  4. Ignoring the exit rule

    The exit drives the results as much as the entry.

Check your understanding

Test yourself before moving on. Each answer comes with an explanation.

Q120-day high $45, 20-day low $35. Where is the midline?
Q2What does a close above the upper Donchian band mean?

Key points to remember

  1. Donchian Channels track the highest high and lowest low.
  2. 20 periods is the usual default.
  3. Breaks above or below signal possible new trends.
  4. The Turtle traders made them famous.
  5. Expect many false breakouts in ranges.

Frequently asked questions

What is the best Donchian Channel period?

20 is standard; the Turtles also used 55 for longer-term entries.

Are Donchian Channels and Price Channels the same?

Yes, Price Channels is another name for the same indicator.

Do Donchian breakouts still work?

They can in strongly trending markets, but results vary and costs matter.

Further learning

Sources

This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.

  1. StockCharts ChartSchool. Price Channels (opens in a new tab) Checked .
  2. Business Insider. Turtle Trading Rules: Trend Following Investing Based on 20 & 55 Day Highs (opens in a new tab) Checked .

Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.