Keltner Channels

Keltner Channels are similar to Bollinger Bands as the indicator is designed to contain most of the price however instead of using standard deviation Keltner Channels use average true range.

 


Keltner Channels were first introduced by Chester W. Keltner in his book “How To Make Money In Commodities” and since then Keltner Channels have evolved into what we use today. Don’t get fooled by the title on the book. This overlay can be used on any market such as stocks, Forex or any other instrument that you may want to trade.

Trading the Channel Learn More About This Indicator

It’s a little similar to Bollinger bands but calculated by using average true range (ATR) and a simple moving average (SMA) which is also called midpoint. This means that the upper and lower bands follow each other like an envelope around price.

What length to choose?

So, how do we trade using the Keltner Channel? As with Bollinger bands, it really is trial and error. Test what length suits your trading style and market. The most common length is a 10 or 20 SMA with a 2X of 10 period ATR.

Tips and ideas

The Keltner Channel has two functions, one similar to Bollinger Bands about showing possible reversal points and one showing strength/weakness.

1. Possible reversal points – When the price closes outside the upper band it’s considered overbought and might return to “normal”. This strategy is best used in sideways price action. In trending markets price can stay overbought/oversold for a long time.

2. Showing strength/weakness – Multiple closes with higher highs outside upper Keltner could indicate the beginning of new move/trend. A pullback to midpoint would then be a good place to look for entry. The opposite can be considered for shorts.

Keltner Channel Annotated Chart

Keltner Channel Chart

Our Implementation

Keltner Channels are best used with other indicators or candlestick patterns. As a standalone it’s relatively “weak”. My personal preference is in sideways price action by buying the lower band and selling at the upper band and I normally combine it with reversal candlestick patterns.

MACD or Moving Average Convergence Divergence Technical Indicator is up next we hope your enjoying this part of the free stock market education part of the website. Please feel free to leave you’re comments and questions below!

Comments

  1. kahfie says

    Hi, Philip,

    As you’ve suggested, I tried setting it to periode 5 and found that almost all prices enveloped within the channel. Those outside of it are big moves (long candles with wide bodies). Does it mean I should set it to 5?
    Regards

    • Philip Thygesen says

      Are you referring to the multiple closes outside the band setup? Some markets and time frame are different so I suggest you try with this setting and then forward test it using a simulator. Forward testing meaning you treat it like trading and take the setup using the new setting but on a simulator.
      Just to let you know that normally when I see a too big candle stick, no matter what indicator it is, then I skip the trade. The wide range bar makes my risk to reward bad.

    • Philip Thygesen says

      The 10 is ATR – Average True Range. It calculates what the average move per bar is over the last 10 bars. I hope that makes sense. If not please let me know.

      Philip

  2. Josette says

    After having read the explanation of the use of the Keltner band, my previous question has been answered completely. Thank you again Sir.

  3. Josette says

    Hello again Phillip. If I may ask, am I to look for all green candlesticks to incorporate this signal to go long? Or, is it o.k. if there are some red candlesticks helping to form the flag which is the signal to soon enter. Thanks again, oh patient one.

  4. Rimienage says

    I have always been a bollinger band trader but this great great post has made me curious about keltner channels. might consider using them as a compliment to my existing strategies

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