Let’s examine how to use Keltner channels.
Keltner Channels is a volatility indicator introduced by a grain trader named Chester Keltner. He did this in his 1960 book, How To Make Money in Commodities.
A revised version was later developed by Linda Raschke in the 1980s.
Linda’s version of the Keltner Channel, which is more widely used, is quite similar to Bollinger Bands. It is similar in that it also consists of three lines.
Keltner Channel vs. Bollinger Bands
However, the middle line in a Keltner Channel is an Exponential Moving Average (EMA).
And the two outer lines are based on the Average True Range (ATR) rather than on standard deviations (SD).The channel is derived from the ATR. It is a volatility indicator itself.
The Keltner Channel also contracts and expands with volatility but is not as volatile as the Bollinger Bands.
Keltner Channels serve as a guide for setting trade entries and exits.
Overbought and Oversold Levels
The Keltner Channel help identify overbought and oversold levels relative to a moving average.
This is especially helpful when the trend is flat.
It can also provide clues for new trends.
Think of the channel as an ascending or descending channel.
The difference is that it automatically adjusts to recent volatility and isn’t made up of straight lines.
Keltner Channels are basically cut from the same cloth as Bollinger Bands.
What sets these two apart are the underlying indicators and calculations.
These formulas yield differences in price sensitivity and the smoothness of the indicators.
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