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Keltner Channels

Keltner Channels are volatility bands plotted around a moving average. Originally devised by Chester Keltner as a trend-following system, they can also be used to trade ranging markets. Linda Raschke popularized a simplified version using an exponential moving average and average true range. Traders can look for signals when price closes above the upper band or below the lower band in a trending market, or reversals near the bands in a ranging market. Variations include using different time periods for the moving average and average true range calculation or basing the bands on a percentage of average true range.

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740 views5 pages

Keltner Channels

Keltner Channels are volatility bands plotted around a moving average. Originally devised by Chester Keltner as a trend-following system, they can also be used to trade ranging markets. Linda Raschke popularized a simplified version using an exponential moving average and average true range. Traders can look for signals when price closes above the upper band or below the lower band in a trending market, or reversals near the bands in a ranging market. Variations include using different time periods for the moving average and average true range calculation or basing the bands on a percentage of average true range.

Uploaded by

ghr.reza20
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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eltner Channels (also known as "Keltner

Bands")
Chester Keltner, in his 1960 book How to Make Money in Commodities, plotted channels as a
multiple of daily range (high - low) around a moving average of Typical Price. Linda Bradford
Raschke popularized a simplified version, using exponential smoothing and Average True
Range, that is now more widely used.

Keltner originally devised the channels for use as a trend-following system, but they may also be
used to trade ranging markets, in a similar fashion to Bollinger Bands or Price Envelopes.

Keltner Trading Signals


First, identify whether price is trending or ranging.

Ranging Market

The theory is that a movement that starts at one price band is likely to carry to the other.

 Go long when prices turn up at or below the lower band. Close your position if price
turns down near the upper band or crosses to below the moving average.
 Go short when price turns down at or above the upper band. Close your position if
price turns up near the lower band or crosses to above the moving average.

Place stop losses below the most recent low when you go long or above the latest high when
short.
Use reversal signals to identify turning points close to the upper and lower bands.
Trending Market

Keltner believed that a close above the upper band, or below the lower band, is evidence of a
strong move and should be traded as a breakout.

 Go long when price breaks above the upper band. Set a stop loss below the moving
average and exit if price crosses below the moving average.
 Go short when price turns below the lower band. Set a stop loss above the moving
average and exit if price crosses above the moving average.

Keltner originally used the lower and upper bands for exits, but these tend to be late.

Example

The RJ CRB Commodities Index down-trend is displayed with the modified version of Keltner
Channels with 20-day exponential moving average, 10-day ATR and Keltner bands set at 2.5
times average true range.

Mouse over chart captions to display trading signals.

1. Go short [S] when price closes below the lower channel


2. Exit [X] when price crosses above the moving average

Example 2

Long-term traders may prefer to use longer moving average and ATR settings. Here is the same
chart, but with 63-day exponential moving average, 21-day ATR and Keltner bands at 2.5 times
average true range.

Mouse over chart captions to display trading signals.

1. Go short [S] when price closes below the lower channel


2. Exit [X] when price crosses above the moving average

ATR Channel Breakout

Curtis Faith in his book Way Of The Turtle describes a variation of the Keltner system used by
the legendary Turtle Traders. The channel is based on a 350-Day (exponential) moving average
of closing prices, with the upper border plotted as 7 times 350-Day ATR and the lower border as
3 times ATR.

 Go long at the open if the previous day closes above the upper band.
 Go short at the open if the previous day closes below the lower band.
 Exit when price crosses back through the moving average.

Accelerating Trends

Linda Raschke maintains that Keltner Bands are of greatest value in determining runaway
market conditions, often referred to as accelerating trends or blowoffs, when retracements are
likely to be extremely short or non-existent. Keltner Bands alert traders that normal trading
techniques, such as buying on dips, should be adjusted to fit the changed circumstances.

Keltner Channel Setup


Incredible Charts provides two versions of Keltner Channels:

 Keltner Channels (Original), using Keltner's first published settings: a 10-day simple
moving average of Typical Price and 10-day average daily range (high - low) with a
multiple of 1; and
 Keltner Channels, the more popular version from Linda Raschke: a 20-day exponential
moving average of Closing Price and a multiple of 2.5 times 20-day Average True
Range.

Separate multiples of ATR can be plotted for the upper and lower bands.

See Indicator Panel for directions on how to set up an indicator — and Edit Indicator Settings to
change the settings.

Keltner Channel Formula


The original formula used a simple moving average of Typical Price, (High + Low + Close) / 3,
but Linda Raschke's version dispensed with Typical Price, as the exponential moving average
provides sufficient smoothing on its own. Here is the formula for the later, simplified version:

Upper Band = Exponential MA of Closing Price + multiple of Average True Range

Lower Band = Exponential MA of Closing Price - multiple of Average True Range

Keltner Evaluation
Keltner Channels are a useful enhancement for eliminating whipsaws when trading trends with a
moving average system.

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