Created by the “father of trend following,” Donchian channel is a great indicator for every trader. This indicator is one of the most straightforward in calculation and reading.
It is categorized as an overlay, lagging, and volatility indicator.
Richard Donchian was an Armenian commodities and futures trader and a self-taught market technician. He was born in 1905 and died in 1993, Richard Donchian is been considered as the father of trend following. The most influential book in his life was the book of Jesse Livermore, Reminiscences of a Stock Operator.
The upper point consists of the N number of days moving average. The N is defined by the user. The N takes usually the 20-day value.
The lower point consists of the N number of days moving average. The N is defined by the user.
The middle line is the middle point between the high and the low points.
Strategy and Use
When the price goes to the upper side, it can indicate the beginning of an upper trend. Of course, it cannot be used just by itself. A trader needs to combine it with other indicators to verify the signal.
Similar, when the price touches the lower outer line of the band, it is a sign of the beginning of a downtrend.