Understanding and predicting the volatility of the market is a large portion of the job of a trader. Prediction of the way in which money will move, however, is a little like predicting just how much sugar will actually appear in every wad of cotton candy spun by hand at the local fairgrounds. You can guess, and guess well, but, at the end of the day, it is still a guess, albeit an educated one. Consequently, various indicators have been developed over the years in order to make sense of the seemingly random movement of values. Everyone wants to know how to make money in the stock market, so understanding the ebb and flow of market values is vital.
The Donchian Channel, created by Richard Donchian, is an indicator specifically designed to analyze volatility. The indicator examines the most extreme highs and lows of a particular stock within a specified period. The difference between the highs and lows is the channel. The more volatile a stock is, the greater the length of the channel. The narrower it is – the more stable the stock. Examining the trend of a stock over time, based on the information provided by the Donchian Channel, can make choosing the stock in which to put your faith, a great deal easier.