The Donchian Channel indicator pursues a trend-following approach and was originally developed by Richard Donchian. With the default option, the Donchian Channel lines will be calculated from the highest high and lowest low over the lookback period. Other than the below description, you may also review our Donchian Channel Indicator Spotlight (with video).
Indicator Description
Our Donchian Channel indicator allows for calculating the channel lines by using the Open, Close, Typical, Median or Weighted price. You may then use the indicator to identify breakouts to either one side of the channel lines.
The Donchian Channel indicator also comes with a trend filter. You may use the default trend definition to determine breakouts to either the up- or the down side. A blue plot indicates a break of the highest high in the lookback period. Conversely, a red plot indicates a break of the lowest low. A neutral trend, as indicated by a yellow plot, occurs when the price retraces beyond the channel midline. The main concept of the indicator is not to predict price movements, but simply to follow them. Accordingly, our version also come with fast, slow and composite trend definitions. For an in depth discussion on these concepts, check out our post on the Donchian Channel indicator.
The Donchian Channel indicator and the Turtle Traders:
The Donchian Channel indicator was famously used by the Turtle Traders in their trading system. Commodities trader Richard Dennis and his long-time friend Bill Eckhardt disagreed on whether great traders are born or made. Eckhardt was convinced that a certain “trader type” character was the determining factor. Dennis on the other hand, thought that trading was a teachable skill.
In order to find out who was right, they advertised for trading apprentices. A group of 23 individuals, with no prior trading experience, were chosen. Over a period of 2 weeks, they were then thought the rules of a simple trend following system.
Upon demonstrating that they could follow the rules, participants were then funded between $200K and $2 million. The group traded a range of commodities, currencies and bond markets. When the experiment ended five years later, the Turtles had reportedly returned a profit of $175 million. This made it the most famous experiment in trading history.
Other Library Indicators
You may increase the probability of locating profitable Donchian Channel indicator setups by using Volume Analysis and avoiding entries that run into key support / resistance levels. A variety of Support / Resistance indicators are available from the Session Tools and Fibonacci indicators categories, including the Current Day Fibonacci Levels / Prior Day Fibonacci Levels, Current Week Fibonacci Levels / Prior Week Fibonacci Levels, the Current Month Fibonacci Levels / Prior Month Fibonacci Levels and the Current N Month Fibonacci Levels / Prior N Month Fibonacci Levels. Finally, our Indicator Spotlight newsletter discussed using Fibonacci Levels for Retracement Entries.
Our newsletter also reviewed other indicators from the Channel Indicators category, namely the Regression Channel and and the Squeeze indicator, which is the dizygotic twin of the Squeeze Channel indicator. The Better Volume indicator and a momentum oscillator, such as the Fast Stochastics, Slow RSI or the Connors RSI may furthermore be used to validate setups.
The Donchian Channel indicator is available for NinjaTrader 8.
