The Keltner Channel Strategy uses the indicator of the same name to determine the direction and strength of price trends.
The Keltner Channel is a volatility-based indicator that analyzes trends using moving averages, similar to the very popular Bollinger Bands.
The Keltner Channel Strategy was created by Chester Keltner in the 1960s, but has moved from Simple Moving Averages (SMA) to Exponential Moving Averages (EMA) in more recent times.
This strategy is very simple to use, but simple trend analysis requires additional technical indicators to identify entry and exit points for trade.
That said, the simplicity and focus of the Keltner Channel Strategy make it a popular element of many of the more complex trading strategies.
Key Takeaways
- The Keltner Channel Strategy uses volatility to identify trend direction and measure trend strength.
- Trend analysis alone is generally insufficient for trade execution, so the Keltner Channel Strategy is most often used as an element of a larger trading strategy.
A Breakdown of the Keltner Channel Strategy
The strategy is based on volatility and the interactions between volatility and price action.
Volatility is a measure of the divergence from the average in price action, so it is useful for analyzing price trends.
The Keltner Channel is made up of 3 lines representing different measures of the standard deviation of the volatility from the average:
- The central line is the Exponential Moving Average (EMA).
- The upper band is set 2 times the Average True Range (ATR) above the EMA.
- The lower band is set 2 times the Average True Range (ATR) below the EMA.
Time periods are adjustable based on preferences, but the standard values are:
- EMA: 20 Periods
- ATR: 10 or 20 Periods
The behavior of the Keltner Channel uses these standard deviation volatility measures to represent the trend.
The interaction between the Keltner Channel lines and the price represents the strength of those trends.
How to Calculate the Keltner Channel
The Keltner Channel is a simple representation of volatility using 2 different measures of the deviation from average:
Middle Channel Line = EMA (20-period)
Upper Channel Line = EMA + (2 x ATR (10-period or 20-period))
Lower Channel Line = EMA – (2 x ATR (10-period or 20-period))
How to Use the Keltner Channel Strategy
The Keltner Channel Strategy is focused on identifying the direction and strength of trends.
The Keltner Channel does have other uses as well, but its main purpose is used in this strategy.
The trend direction is identified by observing the behavior of the channel.
While the price may be moving erratically, the volatility measure smoothes the influence of random noise and isolates the direction of the price trend in the form of the channel.
The more periods used in the calculation of the EMA and the ATR, the larger the price trend will need to be to visually stand out on the price chart.
The second, complementary element of the strategy is determining the strength of a trend.
This is performed by observing the interaction between the price and the upper band and lower band.
The greater the ATR modifier, the larger the bands will be and the less the price will interact with them.
Trend Direction
Easily finding the trend direction using the channel is the elegance and simplicity of the indicator.
Traders simply need to observe the direction of the channel on the price chart, and any trend direction immediately stands out.
However, traders can adjust the number of periods in their EMA and ATR calculations, as this will change the necessary strength of a trend before it becomes visually obvious using the channel.
- If the channel is angled upward, this is a bullish trend.
- If the channel is angled downward, this is a bearish trend.
Trend Strength
The most important element of the Keltner Channel strategy is determining the strength of a trend.
This is found by observing the interaction between the price and the upper and lower bounds of the channel.
- When the price crosses the upper band during an uptrend, this is a strong bullish trend.
- When the price crosses the lower band during a downtrend, this is a strong bearish trend.
The Best Tools for the Keltner Channel Strategy
This strategy may be superficially simple, but experienced traders understand that the results will heavily depend on the time periods used to calculate the technical indicator.
Therefore, it is essential that traders have access to a robust analysis platform that allows for this type of precise calibration.
Our top recommendations for market research tools for retail traders are:
Learning how to perfect the use of this strategy is a long-term effort that involves many details.
Therefore, it is important that traders track their experiences in a contemporary trading journal so they can hone their skills with this and other trading strategies.
Our top recommendation for trading journals for retail traders is: