Donchian channel trend indicator is a popular technical analysis indicator used to find trends and trend changes. This is a channel indicator which gives better insights when the market is trendy. The indicator was developed by Richard Donchian, hence the name.
In Donchian channel indicator, the channel is created in between the upper and lower bands. The upper band is the moving average of highest high prices and the lower band is the moving average of lowest low prices for a certain period. Typical period is 20 days or 4 weeks, but this can be adjusted to make the indicator more or less sensitive. The middle band is optional; it is the average of two bands and is often used for identifying trend changes.
Trading with Donchian channel indicator is easy. The idea is to enter a trade when there is a trend breakout and capitalize on it as long as that trend continues. Traders can go long, or cover their open short positions, when the price crosses the upper channel. Similarly traders can go short, or close their long positions, when the price crosses the lower channel.
Unlike other channel indicators like Bollinger bands, Donchian channel is a simple indicator to plot and follow as it is the simple moving average of only two values – the highest high and lowest low – for a period. Donchian channel often offers the same result as the Aroon indicator, but in different format. Aroon indicator records 100% when the price breaks the Donchian channel.