Donchian Channels
high_period = 20 (5–100) • low_period = 20 (5–100) • middle_period = 20 (5–100) Overview
Donchian Channels were invented by Richard Donchian (born 1905), regarded as the "father of trend following" and the "father of modern commodities trading methods". This simple yet powerful indicator plots the highest high and lowest low over a specified period (default 20), creating a channel that expands and contracts with market volatility. The indicator gained legendary status through the Turtle Trading experiment in the mid-1980s, where novice traders trained by Richard Dennis and Bill Eckhardt used Donchian breakouts to generate $175 million in profits over five years, proving that trading could be taught systematically.
The calculation is straightforward: Upper Channel = Highest High over N periods, Lower Channel = Lowest Low over N periods, and Middle Line = (Upper Channel + Lower Channel) / 2. Donchian Channels serve as both a trend-following tool by identifying breakouts and a volatility indicator - narrow channels indicate low volatility and consolidation, while wide channels signal high volatility and trending markets. Originally designed for slower commodity markets before personal computers existed, the indicator required significant effort to calculate manually but remains effective today, particularly in commodities and currencies.
Interpretation & Trading Signals
Classic Turtle Trading Rules:
- System 1: Enter on 20-day breakout, exit on 10-day opposite breakout
- System 2: Enter on 55-day breakout, exit on 20-day opposite breakout
- Skip Rule: System 1 skips signal if previous 20-day breakout was profitable
- Stop Loss: 2 × ATR from entry price for risk management
Modern Trading Applications:
- Upper Breakout: Price exceeds upper channel = buy signal for uptrend
- Lower Breakout: Price breaks lower channel = sell signal for downtrend
- Channel Width: Wide channels = trending, narrow = consolidating
- Support/Resistance: Channels act as dynamic price boundaries
Market-Specific Performance:
- Commodities: Excellent performance, original design market
- Currencies: Works well for trend-following strategies
- Stocks: Less effective due to different market dynamics
- Modern Markets: Faster-moving markets may produce more whipsaws
Example Usage
Code examples will be available once the Rust implementation is complete.