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Donchian Channel
The Donchian channel is an indicator used in market trading developed by
Richard Donchian. It is formed by taking the highest high of the daily maxima
and the lowest low of the daily minima of the last n days, then marking the
area between those values on a chart.
The Donchian channel is a useful indicator for seeing the volatility of a
market price. If a price is stable the Donchian channel will be relatively narrow.
If the price fluctuates a lot the Donchian channel will be wider. Its primary
use, however, is for providing signals for long and short positions. If a security
trades above its highest n day high, then a long is established. If it trades
below its lowest n day low, then a short is established.
A very common use for the Donchian Channel is to spot breakouts. Generally,
if a stock price breaks above the upper channel from the previous interval,
it could be said that it broke "resistance" and could make a strong
move to the upside. Conversely, when it breaks below the lower channel, a strong
downside move could follow.
In
PowerScan, the Donchian Channel is typically used to detect breakouts. Note
how this stock "breaks" above the upper Donchian Channel, and is therefore
likely to soar much higher.
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