Introduction to Keltner Channels

Introduction to Keltner Channels

Let me explain Keltner Channels directly: they are volatility-based bands placed on either side of an asset's price, and they can help you determine the direction of a trend.

These channels rely on the average true range (ATR) for volatility, with breaks above or below the bands signaling a trend continuation.

Key Takeaways

You should know that Keltner Channels are volatility-based bands set around an asset's price to aid in trend direction. The exponential moving average (EMA) in a Keltner Channel is usually 20 periods, but you can adjust it. Upper and lower bands are typically two times the ATR above and below the EMA, with the multiplier adjustable to your preference. When price hits the upper band, it's bullish; hitting the lower is bearish. The channel's angle identifies trend direction, and price can oscillate between bands, acting as resistance and support.

Understanding the Keltner Channel

Chester Keltner introduced the Keltner Channel in the 1960s, originally using simple moving averages and high-low ranges. By the 1980s, it shifted to average true range (ATR), which is the standard now.

The channel has three lines: the middle is an EMA of the price, with upper and lower bands set two times ATR above and below it. These bands expand or contract with volatility measured by ATR. Most price action stays within the channel, so moves outside can indicate trend changes or accelerations. The channel's direction—up, down, or sideways—helps identify the asset's trend.

Using Keltner Channels

How you use Keltner Channels depends on your settings. A longer EMA adds lag, so channels respond slower to price changes; a shorter EMA makes them quicker but harder to spot true trends. A larger ATR multiplier creates wider bands, meaning price hits them less; a smaller one brings bands closer, so price reaches them more often.

Set up the channels as you prefer, keeping these uses in mind. The channel's angle shows trend direction: rising means price is increasing, falling or sideways means decreasing or flat. Price above the upper band indicates strength, confirming an uptrend if the channel angles up. Dropping below the lower band shows weakness, evidence of a downtrend if angled down. If price keeps hitting the upper band but not lower, reaching the lower could signal fading uptrend momentum. Constantly hitting the lower but not upper, then reaching upper, might mean a downtrend is ending. Price can oscillate between bands, so use them as support and resistance—buy at lower when it starts rising, sell at upper when it falls. After sideways movement, a break above or below with the channel angling that way signals a new trend in the breakout direction.

Keltner Channel Calculation

To calculate the Keltner Channel, start with the middle line as the EMA, typically over 20 periods. The upper band is EMA plus two times ATR, and the lower is EMA minus two times ATR, where ATR is over 10 or 20 periods.

Keltner Channels vs. Bollinger Bands

Keltner Channels use ATR for upper and lower bands, unlike Bollinger Bands which use standard deviation. Their interpretations are similar, but different calculations might give slightly varied signals.

Tip for Using Keltner Channels

This indicator works best in strongly trending markets, where price makes higher highs and lows in uptrends or lower highs and lows in downtrends.

Keltner Channel Limitations

The value of Keltner Channels depends on your settings; decide how to use them and adjust accordingly. Some uses won't work if bands are too narrow or wide. They help with trend direction and signals but pair them with price action, other indicators, and fundamentals for long-term trading. Bands might not always act as support or resistance and may lack forecasting power, possibly due to settings, with no guarantee that hitting a band or moving two ATRs means something significant.

Frequently Asked Questions

Who was Chester Keltner? He was a market technician who developed Keltner Channels in his 1960 book, How to Make Money in Commodities.

What is the Keltner Channel used for? It identifies trade opportunities in swing action as prices move within upper and lower bands.

What is the difference between Keltner Channel and Bollinger Bands? Keltner uses ATR, while Bollinger uses standard deviation.

Are Keltner Channels or Bollinger Bands better? Both are useful but produce different signals; Keltner favors continuations on breaks above or below bands over retracements.

What is a Keltner Channel strategy? If price breaks above the band, consider long positions and exit shorts; if below, consider shorts and exit longs.

The Bottom Line

A Keltner Channel tracks volatility with an asset's EMA and ATR. You can use it to identify trend directions, possible reversals, and price strengths or weaknesses.