Keltner Channel
Definition:
The Keltner Channel has two bands drawn above and below an exponential moving average, and is based on Average True Range.Average True Range is measured by taking a moving average of the greatest value of (a) the distance between this period's high & low, (b) the distance from last period's close to this period's high or (c) the distance from last period's close to this period's low.
Peaks in ATR indicate potential trend reversals after panic sell offs or frantic buying, valleys can indicate consolidations.
The Keltner Channel uses the ATR calculation as values for the bands.
Formula:
The formula for the upper band of the Keltner Channel is to take twice the value of a 10-period ATR and add it to a 20-period exponential moving average. The formula for the lower band subtracts the same value from the 20-period EMA. Interpretation:
The Keltner Channel is typically used to ride upward and downward volatility. When the price spikes above the upper band it can be considered a buy signal until the close for the period evaluated falls below the upper band. Conversely, when the price dips below the lower band it can be considered a sell signal.Because the Keltner Channel is meant to take advantage of volatility swings and is a trend following indicator, it typically does not work well in sideways markets but works better in taking advantage of breakouts within in an established trend.
As with all band indicators, most traders looks for confirmation from other technical indicators.
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