Keltner Channels were invented by Chester W. Keltner, who set them out in his 1960 book 'How to make money in commodities'. They are another volatility-based indicator that look very similar to Bollinger bands, and show a central moving average with channel lines above and below. The price used for each period is the average of the high, low, and close. More recent versions of Keltner's use an Exponential Moving Average EMA. Finally, instead of using the standard deviation, Keltner Channels use the Average True Range (ATR) to set channel distance.
Using these ATR values places channels above and below the 10-day EMA so that the exponential moving average dictates direction, and the Average True Range sets channel width and shows the two lines on the chart. Just like the Bollinger’s, Keltner Channels are a trend following indicator used to identify reversals and trend direction. The bands can also be used to identify overbought and oversold levels when the trend is flat.
What kind of signals can you get from Keltner Channels?
As a volatility-based indicator using a moving average, Keltner Channels are used to identify both when a breakout will occur and in which direction. If you have period of narrowing volatility then you might expect this to be followed by increasing volatility. This can be visualised by Keltner's (a narrowing of the bands). Likewise, as with all MA’s the moving average can give you a clearer indication of the direction of the trend.
Keltner Channels are another great alternative to Bollinger bands. If you enjoy using them or have built a strategy around them and are looking at ways to improve it further, it’s interesting to plot Bollinger's and Keltner's on the same chart. That way you can see the subtle, but sometimes important, differences between the two. At the end of the day they are both very similar and whilst Bollinger's are more popular, many traders use Keltner's as they prefer the entry points they provide. Finally, Keltner Channels, as with most technical analysis, should be used in conjunction with other indicators, so don’t forget to test different setups until you find one that suits your approach.