The 21-year-old completed his move after the Lurgan Blues hammered Ballymena 6-1 on Saturday to go top of the standings on goal difference.
"He excites me - young, talented and can play on either wing or up front," said Glenavon boss Gary Hamilton.
"He's got pace, he's got energy. Josh is good at taking people on and making things happen in the final third."
Daniels came through the Candystripes reserve team and earned his first professional contract with Derry in 2013.
"Josh fits the bill of what we're looking for, we're trying to bring young players in and get a hungry squad," Hamilton told the club website.
"We have to thank Derry as well. Josh was looking away to get game time, to play football and, to be fair they've been very, very good with him.
"We've come to an agreement in terms of if we ever sell him on they'll get a percentage of it so it works for everybody.
"He's just excited to get involved but he knows himself he has to wait his chance because the boys are flying at the moment but hopefully we'll have another good young footballer on our hands."
Josh Daniels has joined Irish Premiership leaders Glenavon from Derry City on a two-year deal.