Donchian Channel is a simple but powerful indicator that plots the highest high and lowest low over a specified period. Created by Richard Donchian, the “father of trend following,” it creates a channel that shows breakout levels. The famous Turtle Trading system was based on Donchian Channel breakouts—proving simple systems can generate significant returns.
- Upper band = highest high; Lower band = lowest low
- Breakout above upper = buy; below lower = sell
- Basis of the famous Turtle Trading system
How Donchian Channel Works
Donchian simply tracks highs and lows:
Donchian Channel Calculation:
Upper Band = Highest High over last n periods
Lower Band = Lowest Low over last n periods
Middle Line = (Upper Band + Lower Band) / 2
Example (20-period):
Last 20 days highest high: $110
Last 20 days lowest low: $90
Middle: ($110 + $90) / 2 = $100
If price hits $111 → New breakout above channel
If price hits $89 → New breakdown below channel
The bands are "steppy" - only change when new high/low occurs.
Quick Reference: Donchian Signals
| Signal | Condition | Action |
|---|---|---|
| Breakout up | Price exceeds upper band | BUY (new high) |
| Breakdown | Price breaks lower band | SELL (new low) |
| Price at upper | Testing resistance | Watch for breakout |
| Price at lower | Testing support | Watch for breakdown |
| Price at middle | Neutral | Wait |
Example: Turtle Trading with Donchian
20-Day Donchian Breakout:
| Day | High | Low | 20D Upper | 20D Lower | Signal |
|---|---|---|---|---|---|
| 1 | $102 | $98 | $105 | $90 | In channel |
| 10 | $106 | $103 | $105 | $90 | Breaks above, BUY |
| 15 | $112 | $108 | $110 | $92 | Holding long |
| 20 | $108 | $104 | $112 | $95 | Still above 10D low |
| 25 | $102 | $98 | $112 | $98 | Touches 10D low, EXIT |
Donchian Channel plots the highest high and lowest low over a period. Buy when price makes a new high (breaks upper band). Sell when price makes a new low (breaks lower band). The Turtle Trading system used this simple breakout strategy to generate massive returns.
Turtle Trading Rules (Simplified)
System 1 (Short-Term)
- Entry: 20-day breakout
- Exit: 10-day opposite breakout
System 2 (Long-Term)
- Entry: 55-day breakout
- Exit: 20-day opposite breakout
Position Sizing
Risk 2% per trade. Add to winners on subsequent breakouts.
Donchian vs Other Channels
| Channel | Band Calculation | Behavior |
|---|---|---|
| Donchian | Absolute high/low | Steppy |
| Keltner | ATR from EMA | Smooth |
| Bollinger | Std dev from SMA | Reactive |
Trading Strategies
Pure Breakout
Buy any new 20-day high. Sell any new 20-day low. Simple trend following.
Breakout with Filter
Only take breakouts in direction of longer-term trend (50-day MA).
Pullback Entry
After breakout, wait for pullback to middle line for better entry.
Exit on Opposite Channel
Use 10-day Donchian for exits while using 20-day for entries.
Common Mistakes
-
Expecting every breakout to work – Many breakouts fail. Accept small losses.
-
Moving stops too tight – Donchian trends need room. Use opposite channel for stops.
-
Abandoning after drawdown – Turtle system had 30-40% drawdowns. Consistency is key.
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Ignoring the middle line – Middle line is useful for pullback entries.
How JournalPlus Tracks Donchian
JournalPlus logs Donchian Channel breakouts and position within the channel, helping you analyze your breakout trading performance.
