Donchian Channels were introduced by Richard Donchian. The volatility indicator is displayed as high and low bands which are plotted as the highest high and lowest low of the last n days. A 20-day period is set as a default value. A middle band is also present as the average of the two bands, but is optional.
The Donchian Channel works well in the trending market. It is usually employed to identify breakout prices. When the prices break outside the bands, a possible breakout might occur. If a security traded above the upper band or above the highest high, a long position is established, and if a security traded below the lower band or below the lowest low, a short position is established. On one hand, when the prices are moving within a channel, a possible reversal might occur.