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).
Because the channel is derived from the ATR, which is a volatility indicator itself, the Keltner Channel also contracts and expands with volatility but is not as volatile as the Bollinger Bands.
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 aren’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.
Let’s just say that these formulas yield differences in price sensitivity and the smoothness of the indicators.
How to Trade Forex Using Keltner Channels
The channel top typically holds as dynamic resistance while the channel bottom serves as a dynamic support.
How to Use Keltner Channels as Dynamic Support and Resistance Levels
In an UPTREND, price action tends to be confined in the UPPER HALF of the channel, that 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.
How to Trade Breakouts Using Keltner Channels
Breakouts from the Keltner Channel act as strong hints where price is running off to next.
If the candles start to break below the BOTTOM, then 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.