Keltner Channels (Keltner Channel, KC) is a technical indicator used to determine the trend direction, overbought or oversold levels of the price of a value asset.
Keltner Channels, which focus on price volatility and consist of three separate lines, are similar in general structure to Bollinger Bands and Moving Average Envelopes.
The difference of the Keltner Channels indicator is that, in addition to the moving average (MA) data, it uses Average True Range (ATR) values, which are used to measure price volatility in technical analysis.
Daily ounce gold price chart and Keltner Channels. Source: TradingView
As a reminder, the Bollinger Bands indicator uses simple moving average (SMA) and standard deviation values, while the Moving Average Envelopes indicator uses moving averages and their multipliers.
How are Keltner Channels calculated?
The 20-day exponential moving average (EMA) data usually forms the baseline of the Keltner Channels indicator, although it varies according to the analyst’s preference.
Additional indicator lines are located above and below the main line. Again, although it differs according to technical analysis, the upper line by adding the multiples of the Average True Range (ATR) value to the EMA value; The bottom line is also obtained by subtracting the multiples of the Average True Range (ATR) value from the EMA value.
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Below you can find the Keltner Channels calculation with a factor of 2 for the 20-period exponential moving average (EMA) and Average True Range (ATR):
Baseline = 20-EMA
Upper envelope line = 20-EMA + (ATR x 2)
Lower envelope line = 20-EMA – (ATR x 2)
In this calculation, the corridor widens as the price fluctuations measured by the ATR increase and narrows as it decreases.
Indicates trend changes
Most price action takes place within the channel formed by the upper and lower bands. A break of the channel up or down gives a hint that the trend may change.
Daily chart and Keltner Channels of BTC/USDT pair. Source: TradingView
Like every indicator calculated on a moving average, the KC indicator also provides data with a delay. As it is known, moving averages are a delayed reflection of price movements. Keltner Channels are used to monitor out-of-envelope processes and detect changes in trend.
When the volatility of the market increases, Keltner Channels are a useful indicator for identifying overbought and oversold conditions. Usually, price breaking out of the channel tends to return to the midline line.
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Movement above the upper envelope indicates overbought. A break below the bottom envelope also indicates oversold.
It should be noted that Keltner Channels can highlight market strength as well as indicate overbought and oversold processes. For example, breaking above the envelope indicates overbought, but not necessarily a correction. If there is a strong bull market, it can also mean that purchasing power increases when the Keltner Channels line is exceeded. At this point, the values and trading volumes of alternative indicators such as the relative strength index (RSI) should also be taken into account.
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Reminding: No single technical indicator is sufficient to make a price prediction. As with almost any indicator data, Keltner Channels make sense when used in conjunction with other market data.
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