In this article, We learn about "Keltner Channel ".Let's Go!
Keltner Channel or KC is a technical indicator that consists of volatility-based bands (or channels) set above and below a moving average.
The
channel is typically set to two Average True Range (ATR) values above and below the midline, usually set to the 20 period EMA.
The
Keltner Channel is used to signal a possible price breakout and provide overbought and oversold readings.
This indicator is similar to Bollinger Bands (BB). But instead of using standard deviation (SD) to set the distance of a band from a moving average, the Keltner Channel uses average true range (ATR).
The
Keltner Channel (KC) indicator is classified as the Envelope , similar to the Bollinger Bands (BB) and the Moving Average Envelope (MAE).
Envelope is a technical indicator usually plotted on a price chart with upper and lower limits.
When using the Keltner Channel as an "Overbought/Oversold Indicator", remember that overbought and oversold conditions are typically Trend Strength.
“Overbought” can mean a strong uptrend, while “Oversold” can mean a strong downtrend.
The current trend may continue to strengthen and remain “overbought” or “oversold”.
This is why you must make sure to only use this strategy when the price is sideways or volatile.
How to calculate Keltner channel
While the Keltner Channel was introduced by Chester Keltner in the 1960s, the indicator was updated in the 1980s by Linda Bradford Raschke.
Today we are using the
Raschke version of the indicator.
The Keltner Channel is a combination of two other indicators:
- Exponential Moving Average (EMA)
- Average True Range (ATR)
A moving average is the average price over a certain number of periods. EMA gives more weight to recent prices.
ATR is a measure of volatility.
The Keltner channel requires three parameters:
- Select the length of the exponential moving average (EMA).
- Select the time period for the average true range (ATR).
- Select a multiplier for the average true range (ATR).
Here’s how the Keltner channel is calculated:
Upper Limit = EMA + (ATR x Multiplier) Middle Band = EMA Lower Band = EMA - (ATR x Multiplier)
If you trade different assets, you may need to adjust your Keltner channel parameters slightly.
The parameters you use on one asset may not necessarily apply to another.
The
EMA period is usually set to 20, but can be set to any value you want. EMA length is typically 15 to 40.
A common multiplier for
ATR is 2, which means that the upper band will be plotted 2 x ATR above the EMA and the lower band will be plotted 2 x ATR below the EMA.
When adjusting the frequency multiplier, the higher the frequency multiplier, the wider the channel. The smaller the multiplier, the narrower the channel.
A smaller multiplier (like 1.5) or a higher multiplier (like 2.5) may provide better information for the asset you are trading.
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