A Keltner Channel: What Is It?

Keltner channels are bands based on volatility positioned on either side of the price of an asset and can help identify the trend’s direction. The Keltner channel uses the average true range (ATR), or volatility, and breaks above or below the top and bottom barriers indicate a continuation.

Knowledge of the Keltner Channel

Chester Keltner first introduced the Keltner Channel in the 1960s. The bands were initially calculated using the high-low price range and simple moving averages (SMA). An average true range (ATR) formula was introduced in the 1980s. These days, the ATR method is widely applied.

Three distinct lines make up the Keltner Channel, a technical indicator based on volatility. The middle line represents the price’s exponential moving average (EMA). More lines are positioned above and below the EMA. Usually, the lower band is set at the inverse of two times the ATR (below the EMA), and the upper band is set two times the ATR above the EMA. The bands grow and shrink in tandem with changes in volatility (as determined by ATR).

Moves outside the channel can indicate a change in trend or an acceleration of the trend, as most price action will be contained within the upper and lower bands (the channel). The channel’s direction—which could be up, down, or sideways—can also help determine the asset’s trend direction.

How to Use Keltner Channels

There are several uses for Keltner Channels. A trader’s settings have a significant impact on how they are used. The indicator will lag more with a longer EMA, meaning the channels won’t react to price changes as fast. Although the bands will respond to price changes more quickly with a shorter EMA, determining the trend direction will be more challenging.

A more significant channel will result from increasing the ATR multiplier used to create the bands. Less frequently will the price hit the bands. The price will frequently reach or surpass the bands when the multiplier is smaller because the bands will be closer together.

Bollinger Bands vs. Keltner Channels

Bollinger Bands use standard deviation, while Keltner Channels use ATR to determine the upper and lower bands. The two indicators can provide slightly different information or trade signals because of the differences in the calculations, but their interpretations are similar.

Limitations of the Keltner Channel

The usefulness of the Keltner channels mostly depends on the settings applied. Before setting up the indicator, traders must choose how to use it. Some of the above-discussed applications of Keltner channels are not feasible if the bands are too wide or too narrow.

Chester Keltner: Who Was He?

Market technician Chester Keltner created the Keltner Channels in his 1960 book How to Make Money in Commodities.

What Is the Purpose of the Keltner Channel?

When prices move within an upper and lower band, the Keltner Channel can be used to spot trading opportunities.

What Distinguishes Bollinger Bands from the Keltner Channel?

Although the two technical indicators are similar, Bollinger bands use standard deviation, and the Keltner channel uses average true range (ATR).

Which Metric Is Better, Bollinger Bands or Keltner Channels?

Though they yield different signals, both metrics are valuable. Keltner Channel signals are generated when the price action breaks above or below the channel bands, like Bollinger Bands. However, a continuation is preferred over a retracement back to the opposite or median barrier as the price action breaks above or below the top and bottom barriers.

A Keltner Channel Strategy: What Is It?

The trader should consider opening long positions and closing short ones if the price action breaks above the band. The trader should consider entering short positions and leaving long or buy positions if the price action breaks below the band.

The Final Word

A trading indicator uses an asset’s average true range and exponential moving average called a Keltner Channel to track volatility. Traders use it to determine price strengths and weaknesses, potential reversals, and trend directions.

Conclusion

• Keltner A Channels are lines based on volatility and put on either side of an asset’s price, can help you figure out how a trend is going.
• If you want, you can change the number of times that make up the exponential moving average (EMA) of a Keltner Channel.
• Some people set the upper and lower bands at two times the average true range (ATR) above and below the EMA, but you can change the number to suit your needs.
• When the price hits the upper Keltner Channel band, it’s a sign of strength; when it hits the lower band, it’s a sign of weakness.
• The Keltner Channel’s angle also helps to find the direction of the trend. The price may also go up and down between the upper and lower Keltner Channel bands, which can be seen as support and resistance levels.