What is Keltner Channel Indicator?

Keltner Channels (Keltner Channel, KC) is a technical indicator used to determine the trend direction of the price of a value asset, overbought or oversold levels.

It consists of three separate lines that focus on price volatility. Keltner Channels are similar in general structure to Bollinger Bands and Moving Average Envelopes.

The difference of the Keltner Channels indicator is in addition to the moving average (MA) data. It uses Average True Range (ATR) values used to measure price volatility in technical analysis.

As a reminder, the Bollinger Bands indicator uses simple moving average (SMA) and standard deviation values. The Moving Average Envelopes indicator uses moving averages and their multipliers.

How are Keltner Channels calculated?

The 20-day exponential moving average (EMA) data is subject to analyst preference. It usually forms the baseline of the Keltner Channels indicator.

Additional indicator lines are located above and below the main line. Although it differs according to technical analysis, by adding multiples of Average True Range (ATR) value to the EMA value, in the upper line; As a result, multiples of the Average True Range (ATR) value are also obtained by subtracting the EMA value.

Below you can find the 2-factor Keltner Channels calculation for the 20-period exponential moving average (EMA) and Average True Range (ATR):

  • Base = 20-EMA
  • Top envelope line = 20-EMA + (ATR x 2)
  • Bottom envelope line = 20-EMA – (ATR x 2)

In this calculation, the corridor widens as price fluctuations measured by ATR increases and narrows as it decreases.

Shows trend changes

Most price movements occur 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.

Like any indicator calculated on a moving average, the KC indicator provides delayed data. Moving averages are a lagged 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 exiting the channel tends to return to the midline line.

Movement above the upper envelope line indicates overbought. A break below the lower envelope also indicates oversold.

It should be noted that Keltner Channels can highlight market power as well as indicate overbought and oversold processes. For example, a break above the envelope indicates overbought, but not necessarily a correction. If there is a strong bull market, it can also mean that purchasing power is increasing when the Keltner Channels line is crossed. At this point, the values and trading volumes of alternative indicators such as the relative strength index (RSI) should also be considered.

What is Keltner Channel Indicator? We gave information about the subject. Keep following the SinceCoin.

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