Donchian channel

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The Donchian channel is a simple trading tool that shows the price range over a set number of periods. It uses the highest price and the lowest price from the last N periods to form a channel on the chart. The space between the high and low shows how much the price has moved recently, with a wider channel meaning more volatility.

How it’s calculated (in plain terms):
- Upper line: the highest price in the last N periods
- Lower line: the lowest price in the last N periods
- Middle line: the average of the upper and lower lines (often shown as a midpoint)
N is usually 20, but you can choose any period (daily, hourly, minutes, etc.).

What traders use it for:
- If price breaks above the upper line, it can signal a bullish move and a potential long trade.
- If price breaks below the lower line, it can signal a bearish move and a potential short trade.
- The width of the channel also reflects volatility: a narrow channel means little price movement, while a wide channel means bigger swings.

Practical notes:
- The indicator is available on most charting platforms.
- While it’s simple to use, its signals aren’t guaranteed. Backtesting with the common 20-period setting showed limited overall effectiveness in some studies, and results can be affected by slippage, which may reduce profitability.

Bottom line: The Donchian channel helps you see price extremes and potential breakouts, but it’s best used alongside other analysis rather than on its own.