Donchian and Keltner Channels

Donchian: break to a new N-day high

The upper band of the Donchian Channel is just the highest high of the last N bars, and the lower band the lowest low. Turtle Trading rules: buy on a break of the 20-day high, sell on a break of the 10-day low.

Keltner + Bollinger: spot squeezes

Keltner Channel = EMA ± multiplier × ATR, smoother than Bollinger Bands. When the Bollinger Bands shrink inside the Keltner Channel, that's a squeeze, often a sign volatility is about to expand.

The breakout trap in ranging markets

Breakout methods bet that "new highs lead to more new highs." In a trending market they catch big moves; in a sideways range, new highs quickly fall back into the range, creating false breakouts and a string of small losses.

Key takeaways

• Donchian Channel: the highest high and lowest low of the last N candles. Breaking the upper band = a new N-day high (Turtle rules: enter on a 20-day high breakout, exit on a 10-day low).
• Keltner Channel: EMA ± a multiple × ATR, smoother than Bollinger Bands.
• When the Bollinger Bands contract inside the Keltner Channel (a squeeze), volatility often expands soon after, but it doesn't predict the direction.
• Breakout methods do well in trending markets and keep getting false breakouts in sideways ranges.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

1. Turn on only the Donchian Channel and hover over a "Breakout" triangle: how does that candle's close compare with the highest high of the previous 20 bars?
2. Turn on both Keltner and Bollinger: in "Range, then breakout," find the purple squeeze zone. What does price do once the squeeze ends?
3. Change the Keltner ATR multiplier from 1.5 to 2.5: what does the channel width follow? Do you get more or fewer squeeze zones?
4. Switch to "Sideways range" and look at the Turtle strategy's trade count and return again: how does the breakout method do in a ranging market?

Quiz and explanations

1. Price breaks above the upper band of a 20-day Donchian Channel. What does that mean?

Answer: A new 20-day high.The upper band is the 20-day high.

2. What sets the width of a Keltner Channel?

Answer: ATR.EMA ± a multiple × ATR.

3. In a sideways range, using the Turtle rule "buy a 20-day high breakout", what's most likely to happen?

Answer: Repeated false breakouts and frequent small losses.Without a trend, new highs quickly fall back into the range, and breakout methods get whipsawed.

Terms in this lesson

• ATR (Average True Range): Average true range: the average size of each candle's move, regardless of direction.
• Bollinger Bands: A volatility channel with a 20-day moving average in the middle and bands 2 standard deviations above and below.
• Donchian Channel: A channel formed by the highest high and lowest low of the last N candles; breaking it means a new N-day high or low.
• false breakout (False Breakout): Price briefly moves past a key level, then quickly falls back into its old range.
• Keltner Channel: A channel with an EMA in the middle and bands a few ATRs above and below.
• squeeze (Squeeze): When a channel narrows sharply and volatility is low, often just before a big move.
• standard deviation (Standard Deviation): A statistic for how far data spreads from its average; the bigger the swings, the bigger the standard deviation.
• Turtle Trading rules (Turtle Trading Rules): Famous 1980s trend-following rules: enter on a break of the 20-day high, exit on a break of the 10-day low, and size positions with ATR.