Keltner channel
Type
Other indicator
Short introduction
Keltner bands are a simple and less common band technique published by Chester Keltner in 1960. In general, the envelope technique tries to capture most of the prices within its bands to derive trading signals from the band breaches that are then considered unusual.
Statement
In general, a top exit is considered an overbought signal and a bottom exit is considered to be an oversold signal. In contrast, Keltner interprets the upward breakouts as buy signals on the assumption that they initiate a strong trend.
Formula/calculation
Similar to Bollinger Bands, the determination of the band distance in the Keltner channel is based on a volatility measure, which is defined here as the average range. Keltner channels exist in several variants which differ in the type of moving averages, the addition of a band factor, the price base used (close, typical price), the range term (range, true range) or the interpretation. In this online help, we limit ourselves to the classical calculation:
Middle = SMAn ( (C+H+L) รท 3 )
Keltner Channel = Middle +/- SMAn ( H - L)
where:
C = Daily closing
H = Daily high
L = Daily low
n = Both the period number for the exchange rate average and the period number for the range average
Middle = The middle line of a Keltner channel, which represents a simple moving average of the "typical price" over n days. The "typical price" according to Keltner is the sum of the daily high, daily low and closing price of the last n days divided by 3.
In the classic variant, both period numbers are kept the same. In the literature, you will also find the formulas of the various variants, for example, the Stollers Average Range Channels (Starc).
Interpretation
When prices close above the upper Keltner band, a positive signal is generated because this indicates a breakout in upward volatility. Conversely, when prices fall below the Keltner band, a negative signal is generated, indicating further decline in prices. The bands thus function as support and resistance levels. The upper line marks the support area, whereas the lower line represents the resistance range. Extreme price movements occur when the price moves significantly from the centre line of moving average.
For example, a simple trading system on this indicator generates buy signals when the close breaches the upper band of the indicator from bottom to top, and sell signals when the close breaches the lower band of the indicator from top to bottom.
Default setting
- n = 10 periods