Donchian channels

What it is

Richard Donchian, an early trend-following fund manager, used a channel made of the highest high and lowest low of the last N periods (often 20), with an optional middle line halfway between. A close beyond the channel means a new N-period high or low.

It's the breakout rule behind the Turtle traders' system, and the opposite side of the channel (or a shorter one) is a simple trailing exit.

How to spot it

• Price touching or closing beyond the upper or lower line: a new N-period extreme.

How to use it

• Trend following: enter on a break of the 20- or 55-period channel, exit on a break of a shorter opposite channel.
• Range trading: fade the edges when the channel is flat.

Common mistakes

• Using breakouts in quiet, ranging markets, where most fail.
• Forgetting the channel only moves when a new extreme is made.

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