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, which is more widely used, 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) and the two outer lines are based on the Average True Range (ATR) rather than on standard deviations (SD).
Keltner Channels serve as a guide for setting trade entries and exits.
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, except it automatically adjust to recent volatility and isn’t made up of straight lines.
If you’ve read our lesson on Bollinger Bands, you’re probably guessing that Keltner Channels are basically cut 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 formulas yield differences in price sensitivity and the smoothness of the indicators.
Keltner Channels show the area where a currency pair normally hangs out.
The channel top typically holds as dynamic resistance while the channel bottom serves as a dynamic support.
The most commonly used settings are 2 x ATR (10) for the upper and lower lines and EMA (20), which is the middle line.
This middle line is pretty significant since it tends to act as a pullback level during ongoing trends.
In an UPTREND, the price action tends to be confined in the UPPER HALF of the channel, which is between the middle line as support and the top line as resistance.
In a DOWNTREND, price action usually hangs around the BOTTOM HALF of the channel, finding resistance at the middle line and support at the bottom line.
In a RANGING MARKET, price usually swings back and forth between the top and bottom lines.
Breakouts from the Keltner Channel act as strong hints where price is running off to next.
If the candles start to break out above the TOP, then the move will usually continue to go UP.
If the candles start to break below the BOTTOM, then the price will usually continue to go DOWN.
Keeping an eye out for these channel breakouts can help you catch a big move as early as possible.