Measuring Volatility with an ATR-Adjusted Donchian Channel Width

Summary

The Donchian Volatility Indicator measures the width of a price channel in a separate panel to visualize volatility expansion and contraction. It sets the upper boundary at the highest high over a lookback period plus an ATR-based buffer, and the lower boundary at the lowest low minus the same type of buffer. Their difference is the channel width. A simple moving average of that width serves as a signal line: width above the average marks expansion, while width below it marks contraction.

The article proposes using rising width and upward signal-line crossings to help confirm breakouts, and compressed width to identify possible consolidation. It also suggests that wider readings can inform position sizing. It supplies default parameter settings and an implementation for ProRealTime, but offers no backtest or quantified evidence that these readings predict directional moves. The indicator describes volatility rather than direction, so its signals require context and independent risk controls.

Key ideas

• The indicator measures the range between Donchian extremes after extending both boundaries by an ATR-based buffer.
• Channel width is compared with its moving average to distinguish expanding from contracting volatility.
• Rising width may help confirm a breakout, while contracting width may indicate consolidation.
• The indicator measures volatility rather than price direction.
• The article provides implementation details but no quantified performance evidence.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.