The Donchian Channel indicator is a powerful tool that’s been employed by traders around the globe for decades. What is it and how can traders use it? In this guide, we’ll break down the components of Donchian Channels, how to interpret them, and offer a sample strategy that you can get started with right away.
What is the Donchian Channel indicator?
The Donchian channel indicator, also known by the DC indicator, was developed in 1960s by Richard Donchian who was a pioneer in modern trend-following strategies. It’s used to identify the current markettrend and to determine potential buy and sell signals.
The Donchian Channel closely resembles the Bollinger Bands or Keltner Channel volatility-based indicator. It has three lines, just like these indicators: an upper, lower, and midpoint. The Channels are not based on standard deviations or average true range (ATR) as Bollinger Bands or Keltner Channels. Instead, they are based on the highest and the lowest prices for a specific period.
Donchian Channels can be used to help traders identify potential reversal points and gauge the strength of breakouts.