Donchian Channels
Volatility & bands
Richard Donchian's channel: the highest and lowest price of the last 20 days. This is the core of the legendary Turtle Trader system from the 1980s.
In its original form this indicator uses volume and/or the daily range (High/Low). The scanner only has closing prices and approximates those inputs (see the note at the bottom). So treat the absolute values as indicative; the direction and the crossings remain usable.
Construction & calculation
- Upper band = the highest price of the last 20 bars.
- Lower band = the lowest price of the last 20 bars.
- Center line = the average of both.
- The scanner compares today's closing price with yesterday's band, so the price cannot 'make' its own band.
Upper = highest price of the last 20 bars
Lower = lowest price of the last 20 bars
Interpretation
- A new 20-day high = breakout, buy signal in the trend-following school.
- A new 20-day low = downward breakout, sell signal.
- The Turtles used exactly this: buy on a 20-day high, sell on a 10-day low. Simple and, over many trades, profitable.
How the signal works in this scanner
Buy signal (green)The closing price breaks out above the previous day's 20-day high within the last 4 bars, and is still above it today.
Sell signal (red)The closing price breaks out below the 20-day low and is still below it.
Watch-outs & pitfalls
- Most breakouts fail. The Turtle system worked because the few successful trades were ridden enormously — with strict stops on the rest. Without that risk management this signal is dangerous on its own.
- In a sideways market this is one of the worst-performing signals. Check the Choppiness Index or the ADX before entering on a breakout.