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DC

Donchian Channels (DC) is a technical indicator developed by trader Richard Donchian, consisting of an upper and lower band (channel boundaries) based on the maximum and minimum price values over a specific period.

To use the indicator, you need to use the DonchianChannels class.

Description

Donchian Channels are a simple yet effective volatility and trend indicator. The indicator consists of three lines:

  • Upper line: highest high over the selected period
  • Lower line: lowest low over the selected period
  • Middle line: average value between the upper and lower lines

This indicator was first used by Richard Donchian in his 4-week channel rule, according to which a buy signal occurs when the price exceeds the highest high of 4 weeks, and a sell signal occurs when the price falls below the lowest low of 4 weeks.

Donchian Channels are useful for:

  • Identifying market volatility
  • Determining support and resistance levels
  • Generating breakout signals
  • Defining the current trading range

Parameters

The indicator has the following parameters:

  • Length - calculation period (default value: 20)

Calculation

Donchian Channels calculation is quite simple:

  1. Upper channel line:

    Upper = Highest High over Length period

  2. Lower channel line:

    Lower = Lowest Low over Length period

  3. Middle channel line:

    Middle = (Upper + Lower) / 2

Interpretation

Donchian Channels can be used in various ways:

  1. Breakout Strategies:

    • Breaking above the upper channel line can be viewed as a buy signal
    • Breaking below the lower channel line can be viewed as a sell signal

  2. Trend Determination:

    • If the price is in the upper half of the channel (above the middle line), an upward trend can be inferred
    • If the price is in the lower half of the channel (below the middle line), a downward trend can be inferred

  3. Support and Resistance Levels:

    • The upper channel line can serve as a resistance level
    • The lower channel line can serve as a support level

  4. Volatility Measurement:

    • Channel width (difference between upper and lower lines) indicates market volatility
    • Channel expansion indicates increased volatility
    • Channel contraction indicates decreased volatility

  5. Counter-Trend Strategies:

    • Some traders use opposite signals, expecting the price to return to the middle line after reaching the channel edges

indicator_donchian_channels

See Also

BollingerBands KeltnerChannels Highest Lowest

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