What is the Keltner Channel?
Introduced by Chester Keltner in the 1960's, the Keltner Channel is used as an indicator and was calculated using simple moving average and the high-low price range to create bands. In the 1980's, the formula was revised to use the exponential moving average and average true range for the bands instead.
Understanding the Keltner Channel and its uses
Used as a volatility based technical indicator, a Keltner Channel (KC) is composed of three separate lines. The middle line is the exponential moving average (EMA) of a pair, while the lines above and below are bands based on the average true range (ATR). Being that this is a volatility indicator, the bands expand and contract to reflect the volatility of a pair.
Most price action will be within the keltner channel, therefore moves outside the channel can signal trend changes and accelerations of trends. The direction of the channel can also be used to identify the trend direction of a pair, whether it is moving up, down or sideways.
The angle of the keltner channel may be used as an indicator as a rising channel reflects rising prices, while a falling channel reflects lower prices and likewise when a channel is continually moving sideways it reflects a ranging market.
Another way to look at the keltner channel as a price indicator is to analyse the price and see if it is moving above the channel, which would show an uptrend. On the other hand, a drop below the channel would indicate a downtrend. An uptrend or downtrend is further supported if the channel is angled upwards or downwards.
The keltner channel may also be used as dynamic support and resistance levels. This is achievable due to the middle EMA line of the channel, as it acts as a pullback level during ongoing trends.
During an uptrend, the price is mostly in the upper half of the channel, which is between the middle EMA line as support and the top line as resistance. During a downtrend, the price would be found hanging in the bottom half of the channel, but this time, the support is the bottom line and resistance is the middle EMA line.
It is also important to note that using the keltner channel as an indicator will depend on the settings used for the exponential moving average and both the average true range. The most common settings are usually EMA (20) and 2x ATR (10).