Keltner Channels

The Keltner Channels developed by Chester W. Keltner define a channel on either side of a moving average. This indicator is similar to Bollinger Bands and the Envelope indicator, except for the fact that it is based on the Average True Range, unlike Bollinger Bands which are based on standard deviation and Envelopes which use a percentage of price variation.

Calculation Method

• The upper band corresponds to the Exponential Moving Average of period P plus a certain percentage %R of the Average True Range (ATR) of the same period.
• The lower band corresponds to the Exponential Moving Average of period P minus a certain percentage %R of the Average True Range (ATR) of the same period.

Example

Interpretation

Typically, the upper band is used to define an overbought market that could lead to a downward reversal, and the lower band is used to define an oversold market that could lead to an upward reversal. For example, with a period P = 4 sessions, a long position can be opened when the closing price is lower than the lower band defined with a percentage %R = 77%.