A Hybrid Tool
When employing the tools of their trade, investors often rely on more than one technical indicator to supplement each other, or they rely on hybrid indicators that incorporate the function of two or more separate analysis tools into one.
The Keltner Channels fall into the latter category, serving as a hybrid tool that helps investors gain a few different pieces of meaningful data from a stock’s performance.
What are the Keltner Channels?
The Keltner Channels are a three-band technical analysis tool comprised of two other indicators. Those indicators are:
- The Exponential Moving Average (EMA)
- The Average True Range (ATR)
The EMA establishes the middle line of the three-band channel. The Exponential Moving Average is an average of stock prices for a given set of periods where the most recent periods have more weight than the older periods.
The ATR establishes the upper and lower bands of the channel. Average True Range is a complex measure of market volatility derived from the current market highs and closes versus previous highs and closes. While dependent on each individual stock, the upper and lower bands are generally set at 2 times the ATR.
Together, these two separate indicators form the three bands that comprise the Keltner Channels.The Keltner Channels Click To Tweet
What the Keltner Channels are Used For
The Keltner Channels serve two general purposes:
- Indicate trend direction
- Show the level of market volatility
The Keltner Channels help to highlight trend directions. Their three-band composition serves to describe the stock price’s upwards and downwards motion to a high degree, giving investors signals for when to buy and when to sell. Click this link to access an economic calendar for your trading strategies
The Keltner bands are also a measure of market volatility. When the band’s contract, that means there is less price volatility. When they widen there is more volatility.
What is the Advantage of Using the Keltner Channels?
The motion of the stock prices between the bands gives investors a good look at trend data on a more specific level. Movement between the middle line and the upper band can indicate an upward price trend. If that movement exceeds the upper band, it can indicate price strength. If it drops beneath the lower band, it indicates weakness. Oscillations around the centerline tell investors whether to buy or to sell, especially if the movement begins to bounce close to either outside limit.
The Keltner Channels are a highly customizable tool that can be put to a number of different uses depending on the needs of the investor and the inputs they use to set up the channel. Savvy investors can gain a lot of very specific trend information by paying attention to a stock’s movement within the channels, maximizing the value of their trades in relation to the current trend.
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