What it means
A Donchian channel plots the highest high and lowest low of the previous N bars. A breakout strategy buys when price closes above the upper band and sells when it closes below the lower band. It is the basis of the famous Turtle trading rules (20 and 55 days).
Why traders use it
Trends start with breaks of recent ranges. A breakout system accepts many small losses on false breaks in exchange for staying in the occasional long trend.
Chart examples
Breakout above the 6-bar channel
How to identify it objectively
- 1Choose N (for example 20 bars; the drawing uses 6).
- 2Upper band: highest high of the previous N bars (excluding the current bar).
- 3Entry: a close above the upper band.
- 4Exit: a close below a shorter channel (for example 10 bars) or a trailing stop.
Bullish use
- 1Close above the upper band: long.
- 2Initial stop 2× ATR below entry.
- 3Trail with the lower band of a shorter channel.
Bearish use
- 1Close below the lower band: short.
- 2Initial stop 2× ATR above entry.
What confirms it
- The breakout candle has a strong body.
- Volatility expanding.
What invalidates it
- A close back inside the channel soon after the break (false breakout).
How a hypothetical setup is built
Entry
On the close above the upper band.
Stop
2× ATR below the entry.
Target
No fixed target; trail the stop to let trends run.
A hypothetical illustration of how the concept is turned into a plan, not a recommendation. Practise it on a paper account first.
Related concepts
- Chart PatternsBreakout and Retest
- Technical IndicatorsATR (Average True Range)
- ICT Sessions & ModelsOpening Range Breakout (ORB)
Historical testing
Not tested on The Tradeskill. Breakout systems typically win less than half of their trades and rely on a few large winners; test over many markets and years, including costs.
Limitations: when it fails
- Long losing streaks in ranges.
- Late entries after extended moves.
- Results vary a lot by market and period.
Knowledge check
Pick an answer to see the explanation. Nothing is saved.