when an asset price keeps trading within a narrow range of the donchian channel signaling potential consolidation a breakout could be more likely to occur once the price moves above or below the outer lines 
an important use of donchian channels is to determine support and resistance levels the upper band of the channel diagrams the highest price of an asset over a set period which can serve as its resistance level alternatively the lower band marking the lowest price point for the same time provides the support level a breakout above the upper band can signal the beginning of an upward swing suggesting a potential buying opportunity meanwhile should the price go below the lower band this could be the time for selling or shorting the asset determining when a breakout happens involves watching for when the price moves beyond the upper or lower band you can usually confirm a breakout once the price closes at a point above or below the upper or lower channels beyond using the channels for signs of a breakout they are used to follow trends and strategize accordingly for example you might consider buying a long position on a security when the price stays near or touches the upper band signaling upward momentum alternatively a short position might be in order if there s a similar movement at or near the lower channel the middle line is useful too since it allows you to have another means for seeing relative support or resistance in the asset prices donchian channels can be a risk management tool for locking in profits or stopping a slide in losses for example if you are holding a long position you might want to follow a common approach setting your stop loss just below the lower donchian channel band should the price plunge beneath that point there might be a reversal or breakdown in the trend this could be where you put the stop loss to limit your risk if you have shorted an asset you would place a stop loss at a point above the upper band should the price go above this level you might have an upward trend a stop loss there would protect you from further losses you can also use the donchian channel for trailing stop loss orders for a long position you can gradually push the stop loss upward trailing below the lower band when it s rising if you re in a short position you can adjust it lower trailing just above the descending upper band whether you have a long or short position the middle line of the donchian channel can help you determine where to put a take profit order which is a limit order identifying the price at which you ll get out of a position and pocket the profit you might for instance secure at least some of your profits if the price starts to cross the mid channel line particularly if it s previously worked as a support or resistance level another strategy would involve waiting for the asset s price to hit up against the opposite band of the channel in a long position this would mean using the upper band for taking profits and in a short position similarly for the lower band combining donchian channels with other toolsdonchian channels can be blended with other technical analysis tools to bolster a trading strategy here are several ways to do so moving averages and volume moving averages are used to smooth out price data for a period by creating a constantly updated average price you can lay them over a donchian channel to confirm or isolate trends also you can use volume charts to confirm the solidity of a breakout signaled by the donchian channel relative strength index rsi this measures how rapid price shifts occur often technical analysts use this data scored between 0 and 100 to recognize when there s too much buying or selling of a security you can use rsi with a donchian channel to initiate or back off trades for example a breakout beyond the upper band with a high rsi could suggest an overtraded security and signal the need for caution before buying alternatively a breakout below the lower band and a low rsi could indicate the security is oversold a signal of a potential buying opportunity moving average convergence divergence macd using macd with donchian channels combines trend and momentum strategies macd measures momentum by comparing two moving averages and can be used to confirm signals from a donchian channel for example should a price break the upper donchian band signaling a bullish trend a bullish macd crossover when the line in the macd crosses above the signal line could indicate how strong the trend is likewise should the price drop beneath the lower donchian channel and come with a bearish macd crossover this would signal that the move downward is a strong trend the difference between donchian channels and bollinger bandsdonchian channels plot the highest high and lowest low over n periods while bollinger bands plot a simple moving average for n periods plus or minus the standard deviation of the price for n periods times two this results in a more balanced calculation that reduces the impact of big high or low prints limits in applying donchian channelsdonchian channels have the same limitations as most other technical analysis charts you could be looking at periods that may not reflect the market for an asset or seeing false signals about its future moves there s also the risk of looking for cues to confirm what you wish were the case or have previously concluded here are some potential issues in using donchian channels false breakouts when a price breaks above or below the donchian channel this could suggest a trend and then it quickly reverses direction in the meantime this might have led to a premature and unprofitable set of trades before the reversal lagging indicator donchian channel charts are at best lagging indicators they depict past price changes but don t predict them the donchian channel might not supply signals fast enough to trade on in a highly volatile market sideways markets donchian channels like most technical analysis tools are clearest when dealing with trending markets in sideways markets where trading is within a tight range with no evident trendline the price might touch the upper and lower bands frequently potentially leading to false signals for trend following strategies overreliance on them donchian channels should be used with other technical analysis tools to confirm signals and check your conclusions against the broader market the wrong period setting donchian channels give you the best information when you have chosen the right number of periods to calculate the high and low bands but of course this leads to the question of how to know the number of periods to use that comes from experience since there are no one size fits all directions to give what works for certain assets or markets might not work well in another 