Donchian Channels

Richard Donchian developed the trading approach which became know as "trend following". It was based on the assumption that commodity prices moved in long, sustained moves. Donchian developed and used a trading system based on moving averages. He wrote many articles on futures trading and securities and became known as the father of trend following. Many traders have used Donchian's 5- and 20-day moving averages which he pioneered in 1961. He never revealed why he chose these values, though they are the number of trading days in a week and a month. Channels are normally represented by curved lines, for example, our percentage bands. Plotting the highest close and the lowest close, for the last n periods Donchian created channels that look more like flat lines. Two lines form the upper and lower boundaries of the channel. A third line represents the mid point between the highest and lowest closes. Donchian traded the long side of the market if the channel pointed upwards, buying on a retracement to the lower side (early August and late October in our example). He traded the short side of the market if the channel pointed downwards, selling on rallies to the upper side of the channel or to the mid point line.

Daily Bar chart showing Donchian Channels created by Personal Hotline Mac Software


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