Keltner Channel is a technical indicator based on volatility. It was first introduced by Chester Keltner in the ‘60s.
This indicator has three separate lines. The middle line represents an exponential moving average (EMA). Meanwhile, the upper line is set two times the average true range (ATR) higher than the EMA and the lower line is set two times lower the EMA.
In Keltner Channel, most of the price action is encompassed by the upper and lower bands. Thus, there will be a trend signal, whenever the bands start to move outside the channel.
Traders can also know a particular asset’s trend direction from the direction of the channel.
There are different formulas to calculate each of the lines within this indicator. Below are the formulas.
The Middle Line= EMA
The Upper Band= EMA + 2 x ATR
The Lower Band= EMA – 2 x ATR
EMA: Exponential moving average (commonly over 20 periods)
ATR: Average True Range (commonly over 10 to 20 periods)
In calculating the indicator, you need to calculate the EMA and ATR from the asset based on the last 20 periods or the other numbers of periods you desired. For the upper band, you need to multiply the ATR by two and add it to the EMA.
While, for the lower band, you need to also multiply the ATR by two, then subtract that number from the EMA. You need to repeat these steps if each period ends.
What Can Traders Get from Kaltner Channel?
The function of this indicator depends on the setting that each trader uses. If the trader uses a longer EMA, then he or she will get a more lag indicator. Thus, the channels will not give a fast respond as the price fluctuates.
Contrarily, a shorter EMA means the bands will react faster to the changes in the prices. Other than that, a bigger multiplier of ATR also creates a larger channel. That way, the price will less often hit the band.