Keltner Channel

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The Keltner Channel is a volatility based "envelope" indicator named after Chester W. Keltner, which measures the movement of stocks in relation to an upper and lower band. Initially, Chester W. Keltner used a High-Low range to build upper and lower bands of the channel, but, Bradford Raschke offered in 1980 to use Average True Range (ATR) for this purpose and since then the Keltner Channel has been based on Moving Averages and ATR.

The middle (center) line of Keltner Channel is formed by a Simple or Exponential Moving average of the typical price (High + Low + Close) / 3. Then the Average True Range is calculated, the value of which is then added to and subscripted from the middle line to draw upper and lower bands. The most common setting for a moving average is 20 bars and for ATR it is 10 bars. It is also common to multiply the ATR (usually by 1.5) before adding and subscripting its value from the moving average.

The Keltner Channel indicator is similar to the Bollinger Bands®, except that Bollinger Bands use the Standard Deviation while the Keltner Channel uses the ATR and volatility component. Like Bollinger Bands and other channel (envelopes) based indicators, the Keltner Channel is usually used in technical analysis to signal price breakouts, to show trends, and to give overbought and oversold readings.

One of the simplest ways to use Keltner Channel is to buy when the price breaks above upper band and sell when the price breaks below lower band. Such strong moves are usually noted at the end of one trend and the beginning of another.

Since the Keltner Chanel is based on a moving average, it lags, like all moving average-based technical studies, and is difficult to use to spot exactly the bottom and top of trends. Therefore, this indicator is used as a trend-following indicator and many professional investors prefer to use it in conjunction with some leading indicators (trend-predicting indicators).

Chart 1: NASDAQ 100 Index (^NDX) - Keltner Channel