The
Keltner Channel is based on the Average True Range
and is sensitive to volatility. It may be used
in place of standard deviation (Bollinger) bands
or percentage envelopes.
Overview
- The Keltner Channel
is made up of two bands plotted around an
Exponential Moving Average (EMA), usually
the 20-day EMA.
- Prices breaking
through the bands often produce buy and sell
signals. The indicator was originally developed
by Chester Keltner and later modified by Linda
Raschke to use an average true range (ATR)
calculated over 10 periods.
Interpretation
As with
all envelope or band systems, the probability
is that price will remain within the envelope.
When price breaks though the envelope, it can
be taken as a signal to either buy or sell.
When prices
close above the top band, this often means
a breakout in upward volatility to be followed
by higher prices. When prices close below the
bottom band, prices are expected to move lower.
In a rising
market the middle line, or 20 period EMA, should
provide support. Conversely, in a falling market
it tends to provide resistance.
As with
all trend following systems, the Keltner Channel
works well in up trends or down trends, but doesn't
work well in a sideways channel. As a trend following
system it is not meant to catch tops or bottoms.
Keltner
channels should be used in combination with other
indicators, such as RSI or MACD, to provide confirmation
of the strength of a market. An exit strategy
utilizing trendlines and other indicators can
be particularly important, as can be seen from
the example above. Waiting for the price to close
below the lower band often erodes much of the
potential profits from a good move.
The calculation
for Keltner Channel, based on ATR, is as follows:
- For the top or
Plus Band, the ATR is calculated over 10 periods,
doubled and added to a 20 period exponential
moving average
- For the bottom
or Minus Band, the ATR is calculated over
10 periods, doubles and subtracted from a
20 period exponential moving average
Signals
- When prices close
above the plus band, it is a signal of strength
and rising prices
- When prices close
below the negative band, a signal that prices
will drop is indicated
- Signals stay in
effect until the prices close across the opposite
band. This should often be tempered, however,
with the use of other indicators to provide
better exit opportunities.
Further
information
Also see
the overview on Envelopes & Bands; as well
as Bollinger Bands, the
Price Channel indicator,
and Average True Range.
