The Keltner Channels volatility indicator was developed by a grain trader named Chester Keltner in his 1960 book, How To Make Money in Commodities.
Linda Raschke later developed an updated version in the 1980s.
Linda’s version of the Keltner Channel, which is more generally used, is similar to Bollinger Bands in that it has three lines as well.
In a Keltner Channel, however, the central line is an Exponential Moving Average (EMA), and the two outer lines are based on the Average True Range (ATR) rather than standard deviations (SD).
The Keltner Channel contracts and expands with volatility because it is derived from the ATR, which is also a volatility indicator, but it is not as volatile as the Bollinger Band.
Keltner Channels are used to assist trade entry and exit decisions.
The Keltner Channel can be used to determine overbought and oversold levels in relation to a moving average, which is especially useful when the trend is flat.
It might also provide hints about emerging trends.
Consider the channel to be an ascending or descending channel, but it adjusts to recent volatility and isn’t made up of straight lines.
If you’ve read our Bollinger Bands course, you’re undoubtedly assuming that Keltner Channels are carved from the same fabric. So, almost.
What distinguishes these two is the underlying indicators and calculations, which we could go on and on about… but might put you to sleep.
Let us only note that these formulas produce disparities in price sensitivity and indication smoothness.
How to Trade Forex Using Keltner Channels
Keltner Channels depict the area in which a currency pair typically hangs out.
The channel top is normally dynamic resistance, while the channel bottom is dynamic support.
How to Use Keltner Channels as Dynamic Support and Resistance Levels
The most popular values for the upper and lower lines are 2 x ATR (10) and EMA (20) for the middle line.
This middle line is significant because it acts as a pullback level during ongoing trends.
Price action in a UPTREND tends to be confined to the UPPER HALF of the channel, which is between the middle line as support and the top line as resistance.
Price activity in a DOWNTREND often hangs around the BOTTOM HALF of the channel, with resistance at the middle line and support at the bottom line.
Price frequently swings back and forth between the top and bottom lines in a RANGING MARKET.
How to Trade Breakouts Using Keltner Channels
Breakouts from the Keltner Channel act as strong hints where the price is running off to next.
If the candles start to break out above the TOP, then the move will usually continue to go UP.
If the candles begin to break below the BOTTOM, the price will typically continue to fall.
Keeping an eye out for these channel breakouts can help you catch a big move as early as possible.
Next Lesson: How to Use the MACD Indicator