Keltner Channel (Understanding, Calculation)

The Keltner channel, like Bollinger Bands, is a technical analysis indicator that uses the standard deviation to set the bands. It is made up of three segments: a central moving average line, as well as channel lines positioned above and below the central one. Chester W. Keltner (1909–1998), who mentioned the indicator in his 1960 book How To Make Money in Commodities, is the name given to it. Those who learned about it from Keltner gave it this name, but Keltner named it the ten-day moving average trading rule and made no claim to originality for the concept.

Keltner Channels set channel distance using the Average True Range (ATR) rather than the standard deviation. A Keltner Channel’s exponential moving average (EMA) is usually 20 periods, but this can be changed if desired. The upper and lower groups are ordinarily set multiple times the average true range (ATR) above and underneath the EMA, albeit the multiplier can likewise be changed dependent on close-to-home inclination. The channels are commonly set two Average True Range esteems above and underneath the 20-day EMA. The path is determined by the exponential moving average, and the channel width is determined by the Average True Range.

Example of Keltner Channel

According to Keltner, the middle line is a 10-day simple moving average of typical price, where typical price is the average of the high, low, and close for each day,

typical price = high + low + close / 3

The lines above and below the centerline were drawn at a distance, with the distance being the simple moving average of the trading ranges over the previous 10 days. A close above the upper line is regarded as a clear bullish signal, while a close below the lower line is regarded as bearish. The Keltner Channel was later additionally reconsidered by Linda Bradford Raschke, who included distinctive averaging periods, an outstanding moving normal, and the average true range (ATR) for the groups. The upper Keltner Channel band is bullish, while the lower Keltner Channel band is bearish. The Keltner Channel’s angle also helps in deciding trend direction.

Chester Keltner introduced the “Ten-Day Moving Average Trading Rule” in his 1960 book, How to Make Money in Commodities, which is credited as the first edition of Keltner Channels. This original version started with a 10-day SMA of the typical price = (H+L+C)/3) as the centerline. These modifications were not made separate from Keltner’s unique thought, and there is still some disarray behind the specific meaning of the Keltner Channel. Be that as it may, the amendments are ordinarily acknowledged and utilized. The root of this concept is unknown. Keltner was a Chicago grain trader, and it’s possible that the information was well known among traders at the time.

In the 1980s, a new formula based on average true range (ATR) was introduced; the ATR method is still widely used today. In comparison to Keltner’s initial 10-day moving average, the EMA (exponential moving average) is normally calculated over 20 cycles. The equations for these will be talked about in detail underneath, yet the upper and lower groups grow and contract as the unpredictability does as such. Extra lines are put above and underneath the EMA. The upper band is usually two times the ATR higher than the EMA, and the lower band is usually two times the ATR lower than the EMA. As volatility (as calculated by ATR) rises and falls, the bands expand and contract.

Keltner Channels are calculated in three stages. First, choose the exponential moving average’s duration. Choose the time periods for the Average True Range in the second phase (ATR). Choose the multiplier for the Average True Range in the third step.

Middle Line: 20-day exponential moving average (EMA)

Upper Channel Line: 20-day EMA + (2 × ATR(10))

Lower Channel Line: 20-day EMA – (2 × ATR(10))

Where:

EMA = Exponential Moving Average (typically over 20 periods)

ATR = Average True Range (typically 10 or 20 periods)

2 = Multiplier

How to Calculate Keltner Channels –

  • Until calculating the EMA, choose the asset’s duration, which is usually 20 periods but can be changed.
  • After the number of periods has been chosen, calculate the Average True Range (ATR) (again, usually 20 but may change).
  • Choose the multiplier for the ATR. This is usually two but may also be altered.
  • To find the upper band’s value, multiply the ATR by the multiplier (usually two) and then add the result to the EMA.
  • To find the value of the lower band, multiply the ATR by the desired multiplier (typically two) and deduct the value from the EMA.

Keltner is a character in the film Keltner Channels may be used in a variety of ways, depending on the settings that a trader employ. The indicator will have more latency if the EMA is longer, so the channels will not respond as quickly to price changes. A more limited EMA will mean the groups respond rapidly to value changes yet will make it harder to recognize the genuine pattern heading. With a remarkable moving normal as its establishment, Keltner Channels are a pattern following pointer. Keltner Channels, including moving averages and other trend-following measures, lag market action. The channel’s direction is determined by the moving average’s direction.

When the channel moves lower, there is a downtrend, and when the channel moves higher, there is an uptrend. When the channel turns horizontally, the pattern is smooth. A larger channel would benefit from a larger multiplier of the ATR used to create the bands. The price would be less likely to touch the bands. A more modest multiplier implies the groups will be nearer together and the cost will reach or surpass the groups all the more frequently. A channel upswing and break over the upper pattern line can flag the beginning of an upturn. A channel slump and break beneath the lower pattern line can flag the beginning a downtrend.

Strong movements in either direction frequently start Keltner Channel trends, with surges above the upper band suggesting unusual strength and surges below the lower band indicating unusual weakness. After a channel breakout, a strong trend may not take place, and prices may oscillate between the channel lines. Such exchanging ranges are set apart by a moderately level moving normal. The channel limits would then be able to be utilized to distinguish overbought and oversold levels for exchanging purposes.

The Keltner Channels’ utility is largely determined by the settings used. Traders must first determine how they will use the indicator, and then set it up to support that goal. Solid moves, for example, these would ordinarily flag the finish of one pattern and the start of another. Notwithstanding, there are additionally times where solid patterns don’t grab hold after a channel breakout, and the costs just stay inside the channel lines, shown by rather level moving midpoints.

Any of the above-mentioned Keltner Channel applications would fail if the bands are too narrow or too far apart. The bands could not serve as support or opposition, and they might seem to have little predictive power. The ATR multiplier is also set at the user’s discretion. All things considered, a bigger multiplier implies that the channels will be bigger and the chance of the costs hitting the upper or lower groups will be more modest. Interestingly, more modest multipliers show that the groups are reached regularly.

Information Sources:

  1. stockcharts.com
  2. investopedia.com
  3. corporatefinanceinstitute.com
  4. wikipedia