Donchian Channels: the breakout system that built trend following

What it measures

Donchian Channels plot the highest high and the lowest low over a lookback period. There is no smoothing and no weighting — the bands are literally the extremes of the window.

That simplicity is why they remain a reference: a break of the upper channel is, by definition, the highest price in N bars, which needs no interpretation.

It is also why they are unforgiving. There is no smoothing to absorb a single spike, so one anomalous bar sets the channel for the whole lookback and keeps it there until it drops out of the window — which is either exactly what you want from a breakout system or exactly what ruins it, depending on the market.

How it is calculated

These are the steps Basis performs, verified against the published definition.

1. 1

   The upper channel is the highest high over the lookback period.

2. 2

   The lower channel is the lowest low over the same period.

3. 3

   The basis is the midpoint between them.

Settings

Twenty periods is the common default; the original turtle system used twenty for entries and ten for exits. The asymmetry matters — exiting on a shorter window than you entered on is what keeps the profits.

How to read it

• Price touching the upper channel is a new N-bar high. Whether that is a breakout or an exhaustion depends entirely on context the channel does not provide.
• The channel width is a volatility reading, similar in spirit to ATR but based on extremes rather than averages.
• The midpoint often works as a trailing exit for a position taken on a channel break.
• A channel that has not moved for many bars is a range with defined edges, and the longer it holds the more orders accumulate just beyond them.

Where it misleads

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