Top 3 Ways of Keltner channel Practical Trading
The Keltner channel is a technical indicator that plots two bands above and below a moving average using Average True Range (ATR). Chester W. Keltner created the Keltner channel, which he mentioned in his 1960 book How To Make Money in Commodities.
Keltner channels resemble envelopes or Bollinger bands, but instead of standard deviations as in the case of Bollinger bands, they use ATR. Keltner channels assist traders in identifying overbought and oversold regions on price charts.
Table of Contents
- Keltner’s Channels Formula
- Use of Keltner’s Channel
- Difference Between Bollinger Band & Keltner Channels
- Keltner’s Channel FAQ
Keltner’s channels also provide valuable information regarding trend reversals and act as additional confluence factor in price action trading.
Keltner’s Channels Formula
Modern Day Modified Formula
Middle line= 20 period Exponential Moving Average
Upper Band = Exponential Moving Average+2*ATR
Lower Band= Exponential Moving Average-2*ATR
Original Keltner’s Formula
Middle line=10 Period Simple Moving Average of Typical Price
Upper Band =Middle Line+ 10 Period Moving Average of Daily Price Range
Lower Band=Middle Line- 10 Period Moving Average of Daily Price Range
Where
Typical price = high + low + close/3
Use of Keltner’s Channel
Originally keltner channel was used in commodity trading and middle band was a function of simple moving average only, at the starting ATR was also not part of the original strategy and was called 10 day moving average trading rule by its founder Chester W. Keltner
Later, changes were made to the original indicator, and the Exponential Moving Average (EMA) was introduced in place of the simple moving average, as well as ATR.
Present day Keltner channel is used in its modified form, there are three ways to use keltner channel in price action trading –
1. Keltner’s channel with EMA
The upper band of the Keltner channel is used to define an overbought market that may experience a downward correction, while the lower band defines an oversold market that may experience an upward correction.
Using EMA with Keltner channel provides decent setup especially in trending markets,To define the trading strategy using EMA consider following conditions for entry and exit-
Long Entry –
Current closing price Yesterday’s 4 day EMA – 77% OF ATR ( 4 days) & Above 270 day EMA
Go long if current closing price is less than yesterdays 4 day EMA minus 77% of four days ATR and if above 270 days EMA
Short Entry –
Current closing price Yesterday’s 4 day EMA +77% OF ATR ( 4 days) & Below 270 day EMA
Go short if current closing price is greater than yesterdays 4 day EMA plus 77% of four days ATR and if below 270 days EMA
Cover the positions if any one of the conditions from the equation deviates.
2. Keltner’s Trend Following System
With Keltner’s trend following rule, a long entry is made when the current price high surpasses the high of the previous period by a minimal unit of price measurement.
Similarly, a short entry is made if the price falls by the minimum unit of price measurement below the low of the previous period.
Although Strategy appears to be robust during back testing, actual trading appears to be very expensive with this type of setup, as many signals are generated in relatively short periods of time, particularly during choppy markets.
As a result, broking fees and other transaction costs skyrocket, and the overall result is subpar.
3. Ten Day Moving Average Rule
In its original form, the Keltner channel used this rule to get long and short trades in commodity markets. It is a very simple rule that involves going long when the current day’s high crosses an upper band and going short when the current day’s low crosses a lower band.
The upper and lower bands are the 10 day simple moving average of the daily price range added to and subtracted from the typical price line’s 10 day simple moving average.
Where typical price = high + close + low / 3
Difference Between Bollinger Band & Keltner Channels
| Bollinger Bands | Keltner’s Channel |
|---|---|
| Bollinger bands use standard deviations to get the upper band & lower band | Keltner’s channel use ATR to calculate the upper band and lower band |
| Bollinger bands can be used to measure volatility expansion and squeeze | Keltner’s channels can only be used to gauge the oversold and overbought price levels |
| Using standard deviations makes bollinger bands less reactive to choppy markets which makes bollinger band better in case of choppy markets | ATR has more fluctuations, during choppy markets. Keltner’s channels are incapable of filtering market noise. |
Keltner’s Channel FAQ
What is a Keltner’s Channel?
Keltner’s channel is a volatility based indicator which uses Average True Range to plot two bands above and below a moving average.
How To Plot Keltner’s Channels?
Use 20 day period EMA and plot upper band by adding 2 ATR value to this exponential moving average, similarly subtract 2 ATR value to get the lower band.
Which is better Bollinger Bands or Keltner Channel?
Keltner’s channels are more vulnerable to market noise; nonetheless, Bollinger bands perform far better in greater time frames than Keltner’s channels. Using Keltner’s channel to uncover overpriced and underpriced stocks is a somewhat better strategy than classic band and envelope trading.
