The Keltner Channel was initially introduced by Chester Keltner in 1960. Keltner Channel is a trend-following as well as a volatility-based indicator that can be utilized to identify reversals with channel breakouts and channel direction. Channels also help in detecting overbought and oversold levels when the trend is flat.
In This Article –
What is Keltner Channel?
How to analyze charts using Keltner Channel?
How to Use Keltner Channel on KEEV?
Category – Trend and Volatility
Type –Lagging
What is Keltner Channel?
The Keltner Channel is a volatility-based indicator that consists of three lines. The middle line here reflects the exponential moving average (EMA) of the price. The upper and lower bands are set twice the Average True Range (ATR). The default period of middle EMA is 20 periods.
Price is found to be moving between the upper and lower bands which are recognised as the channel. You can identify the direction of trends with the help of the direction of the channel. If the channel is up then the price is rising and if the channel is downward then the price is falling.
Formula:-
Upper Band = EMA + (ATR × Multiplier )
Middle Band = EMA
Lower Band = EMA – (ATR × Multiplier)
Where:-
EMA = Exponential Moving Average
ATR = Average True Range
How to analyze charts using Keltner Channel?
Let’s understand how to analyze charts using Keltner Channel.
Indicators that are based on channels or bands are found to analyze the price action. Moving prices above or below the channel lines attracts attention as it's relatively rare.
The price movement above the upper channel line reflects extraordinary strength whereas price movement below the lower channel line reflects extraordinary weakness. Such strong movements which are observed above or below the channels can signal the end or beginning of the trend.
Chart 1
Image Source:- https://www.elearnmarkets.com/blog/wp-content/uploads/2021/07/1-1024x548.png
As the middle line here reflects exponential moving average, Keltner Channels are also a trend-following indicator and lag price action.
The direction of the indicators determines the direction of price movement. You will find a downtrend when the channel moves lower and an uptrend when the channel moves higher. Whereas if the channel moves sideways then it indicates the flat trend.
When the channel reverses up and breaks the upper trend line then it determines the start of an uptrend. Whereas when the channel reverses down and breaks below the trend line then it determines the start of a downtrend.
At times it happens that a strong trend doesn’t take hold after the breakout and prices oscillate between the channel lines indicating consolidation.