Background: The Donchian Channel method, also known as the 4-week or 20-day rule, was developed by Richard Donchian, one of the pioneers in commodity trend trading with mechanical trading systems. He also developed a trading system based on 5-day (a week) and 20-day (a month) moving averages.
Trading systems today tend to become very complex by taking advantage of computer-power, but the very simple Donchian Channel method was found to be the most successful of all approaches in studies of futures trading during the 1960s through the 1980s. Traders have made many modifications of these channel breakout systems, including the well-known Turtle trading technique used by Richard Dennis.
Purpose: The basic Donchian Channel method identifies the precise points where prices break through the high or the low of the previous 20 days. Traders use these breakout areas to enter and exit long or short positions with a stop-and-reverse, always-in-the-market approach. The trades are likely to be long-term position trades and may require the use of long-term continuous charts.
Basic signals: The rules for the 4-week Donchian Channel method are very simple:
Go long (and cover short positions) when the price exceeds the highs of the previous four weeks (20 days).
Go short (and exit long positions) when the price falls below the lows of the previous four weeks.
Repeat as necessary.
Roll into the next contract, if necessary, on the last day of the month before expiration.
The chart below illustrates the basic 20-day channel method with the buy and sell points on the breakouts. However, the time frame or degree of risk from always being in a position may be greater than some traders would like.
Here is my latest creation regarding High-Low (Donchian) Channel. It draws histograms so the channel is colored with several bullish/bearish areas. I have also added full features : MTF ; lines and histo can be drawn or not ; outside levels and shift ; etc.
Below is an example with shifted outside levels (26). Remember that outside levels don’t make sense if they are not shifted, because they will never be hit. It’s just a tricky stuff, but it can be usefull for projecting levels above last highs and below last lows X periods ahead (for targets or support/resistance).
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