Donchian Channels: Measuring Market Extremes

Donchian Channels measure the extremes of price movement over a specified lookback period, creating dynamic support and resistance zones that adapt to market volatility.

The indicator consists of three lines: the upper channel (highest high over N periods), the lower channel (lowest low over N periods), and the middle line (average of upper and lower channels). These channels expand and contract based on recent price volatility.

What makes Donchian Channels unique is their focus on pure price extremes rather than complex calculations. The upper channel marks the highest price point reached in the recent past, while the lower channel marks the lowest. This creates a price-driven envelope that reflects market sentiment and volatility.

The indicator excels at identifying breakout conditions. When price moves beyond the upper channel, it signals potential bullish momentum, while breaking below the lower channel suggests bearish strength. The middle line serves as a trend direction filter.

Donchian Channels don't predict future price movements but rather define the boundaries of recent price behavior. Traders use these boundaries to identify when price is making new extremes, suggesting potential trend continuation or reversal opportunities.

The measurement period (commonly 20 or 50 periods) determines sensitivity. Shorter periods create tighter channels that react quickly to price changes, while longer periods provide broader market context with smoother channel lines.

This indicator measures pure price displacement over time, making it a volatility-adaptive tool for boundary detection rather than a predictive forecasting mechanism.