Keltner Channels

Last modified 15:51, 15 Apr 2015

Overview

The Keltner Channels (KC) indicator is a banded indicator similar to Bollinger Bands.
In his book "How to Make Money in Commodities", Chester Keltner introduced what he called the "10-Day-Moving-Average-Trading-Rule", this would later come to be called "Keltner Channels"

Keltner Channels are most commonly used to identify reversals with channel breakouts and channel direction.

Construction

Since the introduction of the channels and as times have changed the original rules have been expanded upon and simplified many times.
The most commonly utilized form of these - which the Hubb Software employs - was popularized by Linda Bradford Raschke and draws on a multiple of the Average True Range rather than 10-day SMA of the High-Low range of the Upper and Lower Lines with the formula looking as below:

Upper Channel Line: 20-day MA + (2 x ATR(10))
Middle Line: 20-day MA
Lower Channel Line: 20-day MA - (2 x ATR(10))

The graphic below shows the Keltner Channel utilising the default settings applied to a chart.

Keltner Channels.png
The Middle Line is a Moving Average of price over a customizable time period with the default of 20.
Either a Simple Moving Average or an Exponential Moving Average may be used with the former being the default and the latter resulting in a more sensitive indicator.


The Upper and Lower channel lines are drawn at an equal distance from the Middle line, a default of 2x the 10 day ATR is employed by the Hubb Software.

Customisation

 

You may modify the default parameters by navigating to the Keltner Channel properties window.
This can be accessed by right clicking on the Keltner Channel title in the top left hand corner of the chart.

Keltner properties.png

The MA periods, ATR periods and ATR Multiplier may all be modified.

You may also select to calculate the Middle line using an Exponential Moving Average rather than a Simple Moving Average.

 

kc parameters.png

 

Interpretation

Keltner Channels show us price behaviour relative to measurements of volatility, how much it is moving in comparison to how much it has moved in the past.
 

A breakthrough occurring above the Upper channel line signals overbought conditions and a breakthrough below the Lower channel line signals oversold conditions.

In a rising market the middle line, or 20 day Moving Average should provide support. Conversely, in a falling market it tends to provide resistance.

Keltner channels may be used in combination with other indicators such as the  MACD (Moving Average Convergence Divergence) & RSI (Relative Strength index) to confirm the relative strength of a market.

 

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