Keltner Channel

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The Keltner Channel is an indicator of market momentum. It was developed by Chester W. Keltner and introduced in his book “How To Make Money In Commodities.”

Keltner Channels are envelope indicators, similar to Bollinger Bands. A Keltner Channel consists of three measurement bands. The middle band represents the ten-day moving average of the high, low and closing prices for a given asset. The high and low bands are calculated by taking the ten-day moving average of the difference between the high and low closing prices, then adding or subtracting this value from the middle band.

In theory, asset prices should fall between the high and low bands in ninety-five percent of situations. The remaining five percent of situations (when prices fall outside of the Keltner Channel) are therefore strong indicators that asset prices are gaining momentum in either direction.

Keltner's interpretation of the Channel is simple: buy when the price is above the high band and sell when the price is below the low band. By following this advice, a trader would be counting on the trend in price continuing for some time in the given direction. However, another interpretation of the Keltner Channel counsels the exact opposite: buy when the price drops out of the Channel, sell when the price rises above it. This interpretation depends an asset's high momentum indicating that the asset is either overbought or oversold, situations which would make the price vulnerable to rapid turnarounds.

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