What does the Donchian Channel reflect?

The Donchian Channel is a technical analysis tool that specifically reflects the high and low prices over a defined period, typically 20 days. This channel comprises an upper line, which represents the highest high over that period, and a lower line, which indicates the lowest low. As such, it provides traders with an immediate visual representation of price extremes, helping them to identify potential breakout points. The middle line is often the average of the two extremes, which can help signal trends.

The focus on high and low prices allows traders to gauge potential areas of support and resistance, as the current price can be compared to these extremes to assess where it stands relative to recent price performance. This functionality aids in making informed trading decisions based on whether the price action is breaking out or reversing within the context of historical highs and lows.