Keltner Channels are volatility-based technical indicators set above or below an Exponential Moving Average (EMA). They help determine the trend’s direction, signal possible breakouts, and give insights into the oversold and overbought regions.
The indicator is similar to Moving Average Envelopes (MAE) and Bollinger Bands (BB) but uses the Average True Range (ATR) instead of Standard Deviation (SD) to set the distance of the bands from the moving average.
How Does Keltner Channel Work?
The fundamental idea behind Keltner Channel was first introduced in the 1960s by Chester Keltner, an enthusiast in making money through commodities. His original formula used a high-low price range and Simple Moving Averages (SMA) to calculate the bands. Later, the formula was simplified and expanded to include Average True Range (ATR), a method used to date.
The channel is composed of three separate lines:
The Middle Line-a 20-day Exponential Moving Average (EMA):
Upper Channel Line (above the Middle Line): 20-day EMA +(2 x ATR (10))
Lower Channel Line (below the Middle Line): 20-day EMA – (2 x ATR (10))
The Middle Line represents the moving average of the asset’s price over a specific period, usually set to 20 days. By default, the channel uses an EMA, but traders can also use the SMA at their discretion. The distances between the Upper and Lower Lines from the Middle Line depend on the specific multiple of the basic volatility setting-the ATR. The three lines move alongside the price, creating a channel-like chart. Check out tradingview’s advanced charting tools.
Short timeframes, like ten days, give a more volatile ATR, while longer timeframes, like 100 days, give smooth fluctuations that give traders more constant ATR readings. The width of the channel is mainly affected by the multiplier used. For example, changing a multiplier from 2 to 1 will reduce the channel width by half, while increasing from 2 to 3 enlarges the channel width by 50%.
Keltner Channels (KC) Indicator | Indicator Series Click To TweetHow to Use the Keltner Channel
Originally, Keltner Channel was used to determine the trend using indicators. Nowadays, the channels are also used to predict possible breakouts and identify the oversold and overbought levels. Before using the indicator, you need to identify the asset’s price ranges or trends to determine the most effective strategy. Trending charts mainly guide the breakout strategy and trend pullback strategy, while ranging market guides the overbought and oversold strategy.
Bottom Line
The Keltner Channel Indicators give traders market insights, primarily the underlying trend. Identifying the trend is half the battle in trading and can either be flat, up, or down, which calls for bullish or bearish trades or even a nimble approach in the case of a flat trend. For more information on how to use Keltner Channel Indicators and other market analytical tools, contact us today to get started. Subscribe to tradingview.com for free to get great ideas from other traders.