What it is and how to use it
What is it?
The Keltner Channel is a volatility-based envelope indicator that consists of three lines: a middle line, which is an exponential moving average (EMA), and two outer bands, which are set at a multiple of the Average True Range (ATR) above and below the EMA. This indicator helps you identify overbought and oversold conditions, potential breakouts, and trend reversals.
Who made it?
The Keltner Channel was developed by Chester W. Keltner in the 1960s. It was later modified by other traders, including Linda Bradford Raschke, who popularized the use of the Average True Range (ATR) for setting the outer bands.
How is it calculated?
The Keltner Channel is calculated using the following formulas:
Middle Line: Exponential Moving Average (EMA) of the closing prices over a specified period
Upper Band: Middle Line + (ATR * Multiplier)
Lower Band: Middle Line - (ATR * Multiplier)
Code (ProRealTime)
How do you use it?
Overbought/Oversold Conditions:
When the price moves above the upper band, it may indicate overbought conditions and a potential sell signal. Conversely, when the price moves below the lower band, it may indicate oversold conditions and a potential buy signal.
Trend Following:
The direction of the middle line (EMA) can help identify the trend. If the middle line is trending upward and the price is consistently near or above the upper band, it indicates a strong uptrend. If the middle line is trending downward and the price is consistently near or below the lower band, it indicates a strong downtrend.
Breakout Signals:
A breakout above the upper band can signal the start of a new uptrend, while a breakout below the lower band can signal the start of a new downtrend. Traders often look for these breakouts as entry signals.
Volatility Analysis:
The width of the Keltner Channel indicates market volatility. A wider channel suggests higher volatility, while a narrower channel suggests lower volatility.
FAQ
Q: What are the best settings for the Keltner Channel?
A: The default setting for the Keltner Channel is usually a 20-period EMA with a multiplier of 2 for the Average True Range (ATR). Feel free to adjust these settings to fit your trading strategy.
Q: How does the Keltner Channel compare to Bollinger Bands?
A: Both Keltner Channel and Bollinger Bands are volatility-based indicators. The Keltner Channel uses the ATR for its calculations, while Bollinger Bands uses standard deviation. This results in different channel widths and sensitivity to price changes.
Q: What are the best market conditions to trade with the Keltner Channel?
A: Keltner Channels are best used in trending markets to identify pullbacks and breakouts. They can also be effective in ranging markets to identify overbought and oversold conditions.
Strategies using the Keltner Channel indicator
None so far.