Keltner Bands

Barchart provides three versions of Keltner Channels:

• Keltner Channel, using Keltner's first published settings: a 20-day simple moving average of Typical Price and 20-day average daily range (high - low) with a multiple of 1;

• Keltner Channel Exponential, same as Keltner Channel but using a 20-day exponential moving average instead; and

• Keltner Bands, same as Keltner Channel Exponential, which uses EMA of closing price and multiplies by 2.5 of the average true range

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.

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.

Source: IncredibleCharts.com

Keltner Channel Formula

• First, a coefficient named "Period" is defined to hold the number of periods to be used in the exponential moving averages required for the Keltner Channel.

• "MA_typical", an exponential moving average of the Closing Price, is then computed using a multiple of 2.5 times the 20-day Average True Range

• "Diff" is the range for the day. "MA_Diff" is a moving average of "Diff", also using "Period".

• The "Upper" channel is calculated by adding the "MA_Typical" and "MA_Diff" together. The "Lower" channel is a subtraction of "MA_Diff from MA_Typical.

Keltner Evaluation

Keltner Channels are a useful enhancement for eliminating whipsaws when trading trends with a moving average system. If the price breaks out of either the upper or lower band this is interpreted as a continuation signal not a reversal signal.

Parameters:

• Period: 20

• Multiplier: 2.5