Keltner Channels are volatility-based bands that are placed on either side of an asset’s price and can aid in determining the direction of a trend. The Keltner channel uses the average-true range (ATR) or volatility, with breaks above or below the top and bottom barriers signaling a continuation.
The Keltner Channel is named after American grain trader Chester W. Keltner, who described it in his 1960 book entitled “How to Make Money in Commodities.”
Keltner initially described it as a ten-day moving average, and his initial version showed the center line showing the typical price, with it being the average of the high, low, and close (closing) price. The lines above and below the centerline were drawn at a distance away, with the said distance being the simple moving average of the past 10 days’ trading ranges.
Here, the overall strategy is to regard a closing price above the upper line as a strong bullish signal while a close below the lower line is bearish. The Keltner Channel was later further revised by Linda Bradford Raschke, who added in different averaging periods, an exponential moving average, and the average true range (ATR) for the bands.
These revisions were not made separate from Keltner’s original idea, and there is still some confusion behind the exact definition of the Keltner Channel. However, the revisions are commonly accepted and used.
How to Calculate Keltner Channels
- Select the length for the asset, which is typically 20 periods but may be altered before calculating the EMA.
- Calculate the Average True Range (ATR) after the number of periods has been selected (again, usually 20 but may change).
- Choose the multiplier for the ATR. This is usually two but may also be altered.
- Multiply the ATR by the multiplier (typically two) and then add the resulting value to the EMA to find the value of the upper band.
- Multiply the ATR by the desired multiplier (typically two) and subtract the value from the EMA in order to find the value of the lower band.
Summary
- Keltner Channel refers to a technical analysis indicator composed of three separate lines. It includes a central moving average line, along with channel lines located above and below the central one.
- It is named after American grain trader Chester W. Keltner, who described it in his 1960 book entitled “How to Make Money in Commodities.”
- It was later revised, and the modern version uses the exponential moving average (EMA) of the price as the center line.
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