Invented by Richard Donchian in the 1950s, the Donchian channel is a technical indicator used in evaluating securities. Donchian channels are simply the highest high and lowest low over the past N-day period, usually plotted as error bars around the close (or a high/low/close marker). N can take any value, but 20 and 40 are the most common. Donchian channels are most often used as a breakout indicator; if the price breaks outside the channel, a trend is underway.

Originally, the system was very simple: sell short if the day's high broke above the Donchian channel, and buy if the day's low broke below the Donchian channel. Over the years, the channel breakout system was modified somewhat; now two separate channels, usually either 20- and 40-day or 5- and 20-day, are plotted simultaneously. If the price breaks above the outer (longer-period) channel, one should buy; if it breaks below, one should sell short. Likewise, a breakdown/breakout with resepect to the inner channel indicates that one should exit a long/short position, respectively.

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