Keltner Channels is a volatility indicator introduced by a grain trader named Chester Keltner in his 1960 book, How To Make Money in Commodities.
A revised version was later developed by Linda Raschke in the 1980s.
Linda’s version of the Keltner Channel is more widely used.
It is quite similar to Bollinger Bands in that it also consists of three lines.
However, the middle line in a Keltner Channel is an Exponential Moving Average (EMA).
The two outer lines are based on the Average True Range (ATR) rather than on standard deviations (SD).
We derived the channel from the ATR.
The ATR is a volatility indicator itself.
The Keltner Channel also contracts and expands with volatility.
But it is not as volatile as the Bollinger Bands.
Keltner Channels serve as a guide for setting trade entries and exits.
Identifying Overbought and Oversold Levels
The Keltner Channel help identify overbought and oversold levels relative to a moving average, especially when the trend is flat.
It can also provide clues for new trends.
Think of the channel like an ascending or descending channel.
The difference is that it automatically adjusts to recent volatility.
Also, it isn’t made up of straight lines.
If you’ve read our lesson on Bollinger Bands, you’re probably guessing that it cut Keltner Channels from the same cloth. Well, almost.
What sets these two apart are the underlying indicators and calculations that we could go on and on about… but might lull you to sleep.
Let’s just say that these formulae yield differences in price sensitivity and the smoothness of the indicators.
