What Is Keltner Channel?

Keltner Channels are bands that are based on volatility and are positioned on each side of the price of an asset. They may help detect the direction in which a trend is moving.

Breaks above or below the top and bottom boundaries suggest a continuance in the Keltner channel, which employs the Average-True Range (ATR) or volatility.

Acquiring Knowledge about the Keltner Channel

In the 1960s, Chester Keltner was the one who first presented the concept of the Keltner Channel. In the first version of the algorithm, the bands were computed using simple moving averages (SMA) in conjunction with the high-low price range. A new formula that utilized the true average range was developed and implemented in the 1980s (ATR). The ATR approach is widely used in modern times. [1]

Three distinct lines make up the Keltner Channel, a volatility-based technical indicator. The middle line shows the exponentially weighted moving averages (EMA) of the price in the chart. In addition to the EMA, other lines have been added. The upper band is typically established at a level two times the ATR just above EMA, while the bottom band is generally installed at a level that is 2 times the ATR underneath the EMA. As volatility (as measured by ATR) increases or decreases, the bands will expand or shrink accordingly.

Movement outside the channel may indicate a shift in the trend or an acceleration. This is because most of the price activity will be contained inside the higher and lower bands (the channel). The direction in which the channel is moving, whether up, downwards, or sideways, is another factor that may be used to determine the direction of the asset's trend.

Keltner Channel Techniques

Keltner Channels may be used in various ways, the specifics of which are determined mainly by the parameters that the trader applies. If the EMA is made longer, there will be a more significant lag in the indication; thus, the channels will react slower to changes in price. A longer EMA will cause the bands to respond more quickly to fluctuations in price, but it will make it more challenging to determine the direction of the underlying trend.

If the multiplier used by the ATR to form the bands is increased, this will result in a broader channel. There will be fewer instances of the price reaching the bands. A lower multiplier will cause the bars to be closer together, making the price more often match or exceed the bands' thresholds.

Traders are free to configure their Keltner Channels in any manner they see fit, but they should keep in mind the following possible applications:

The Angle of the channel helps determine the direction of the trend. A track that is rising suggests that the price has been increasing. At the same time, a medium that is dropping or moving sideways indicates that the price has been decreasing or going sideways, respectively.

As prices rise higher than the top band, this indicates that price strength is increasing. There is another piece of evidence suggesting that an upward trend is now in effect, particularly if the channels are tilted upward.

Price weakening is indicated when it falls below the bottom band. This suggests the market moves downward, particularly if the channel is inclined downward.

Suppose the price consistently hits the attributes, not the lower band. In that case, when the price eventually reaches the lower band, it may indicate that the trend is losing steam since coming to the lower band indicates that the price has broken below the upper band.

If the price is always reaching the lower band but never, the higher band, then when the price does eventually get the upper band, it may indicate that the downward trend is about to end.

There is also a possibility that the price will bounce between the top and lower zones. In such circumstances, market participants can use the bands as support & resistance. They could try to purchase when the price hits the lower band and then moves upward again. On the other hand, they might look to sell or short the asset whenever the price reaches the upper band and then starts falling again.

Suppose the price drops on either side of the channel after an extended period of trading in a horizontal range, and the channel begins to angle similarly. In that case, this may indicate that an emerging innovation is starting in the direction of the breakout.

Keltner Channel Restrictions

The Keltner Channels' use is highly dependent on the configuration choices. Traders need to first choose how they want to utilize the indicator before configuring it to assist them in reaching their goals. Several of the applications of Keltner Channels discussed before will only be successful if the bands are too close or far apart.

Although Keltner Channels may help determine a trend's direction, they can also generate trading indications. When employed with price action research, fundamentals (if trading for the long term), and other technical indicators, it may potentially help you make better decisions.

In addition, the bands could not function as support or resistance, and they can give the impression of having little capacity to foresee prices. This may be because of the parameters that were selected. However, there is no proof that the price moved two ATRs or struck any bands. That will lead to a business opportunity or the occurrence of some other significant event.

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[1] https://en.wikipedia.org/wiki/Keltner_channel