Bands marking the highest high and lowest low over a lookback period, the basis of classic breakout trend-following systems.
A 20 period Donchian channel plots the highest high and lowest low of the last 20 bars. A close at the upper band is by definition a 20 bar breakout. Nothing is smoothed and nothing is averaged, which makes it the most transparent channel in common use.
It is the core of the original Turtle trading rules, where entries were taken on channel breakouts and exits on a shorter channel in the opposite direction. That system is the canonical example of trend-following with a low win rate and large winners.
The limits are well documented: most breakouts fail, drawdowns are long, and the approach only pays in markets that produce sustained trends. It also adapts poorly to instruments whose volatility changes a lot, which is why modern versions size positions using atr.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Range versus trend. On the left price keeps bouncing between the same floor and ceiling, which is a range. On the right each high and each low is higher than the last, inside a pair of sloping lines called a channel.Breakout and retest. Price stalls under the same level several times, pushes above it, then drops back to touch it from above before carrying on. That touch is the retest, where the old ceiling is tried as a floor. A break that falls straight back under it is a false breakout.
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