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The Donchian channel is an indicator that was introduced by Robert Donchian; it consists of a set of 3 lines used as an envelope in order to calculate the price volatility. The first one is the price highest high over a chosen period; the second one is the lowest low over the same period; the last line is the mean of the two others. For the upper and lower bands, the current price is not included.
The Donchian Channels are used to generate signals for entering and exiting long and short positions. When the price is stable, the channels are tightly close to each other and the price is enclosed within this narrow envelope; when volatility is high, the channels are wide and the price fluctuates between the upper and the narrow bands. It may also happen that the price goes out of the Donchian channels; a breakout is then possible. A good trading strategy consists in going long when the price closes above the upper Donchian Channel and short when the price closes below the lower Donchain Channel.
The Donchian Channel function is named donchian_channel and has two parameters. The first is the period over which the price highest high and lowest low are calculated, and the second is an integer value representing which line to calculate:
-1 corresponds to the lower band.
0 corresponds to the middle line.
1 corresponds to the upper band.