The Keltner Channel is a moving average band indicator whose upper and lower bands adapt to changes in volatility by using the average true range. The Keltner Channel is used to signal possible price breakouts, show trend, and give overbought and oversold readings.
There are many variations to calculating the Keltner Channel, but generally speaking a moving average (10 or 20-period) of the typical price [(High + Low + Close)/3] is used to construct the midline. Then the average true range is calculated over a time period (same as midline, 10 or 20-period) and multiplied by a multiple (usually 1.5); the calculated number is then added to the midline to form the upper Keltner Channel and subtracted from the midline to form the lower Keltner Channel.
A chart of gold futures illustrates a Keltner Channel with a 20-day moving average and an average true range multiplier of 1.5:
There are numerous, sometimes contradictory, ways to interpret the Keltner Channel. The first method is price breakouts outside of the Keltner Channel.
When price closes above the upper band, buy.
When price closes below the lower band, sell.
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