What is the purpose of the Donchian Channel?

The Donchian Channel is designed to highlight price movements over a specific period, typically a 20-day period, which allows traders to identify trends and potential breakouts. As it consists of an upper and lower band that plots the highest high and the lowest low over that designated time frame, the channel helps traders visualize the range within which prices have moved. This visualization aids in gauging market volatility and potential buying or selling opportunities.

The focus on a 20-day period is particularly significant as it captures shorter-term trends while still providing enough data to identify significant price movements, making it a relevant tool for traders looking to make informed decisions based on the recent market activity. It helps indicate periods of consolidation and is often used in conjunction with other technical indicators to confirm trading signals.