Keltner
Channels are a set of three lines that are overlaid on top of the price bars of
a chart. As with other channel overlays, the outer two lines define a region
that generally "contains" the price action and helps you determine if
the prices are "too high" or "too low" relative to a
specified moving average. Here is an example:
In
the chart above, the Keltner Channels are the thin blue lines above and below
the candlesticks on the chart. The red line corresponds to the 20-day
Exponential Moving Average that defines the center of the channel. Notice that
the candles generally appear to "bounce" off the blue channel lines
are return to the red central line.
The
original version of Keltner Channels was described by Chester W. Keltner in his
1960 bookHow to Make Money in Commodities. Keltner called his channel
concept the "Ten-Day Moving Average Trading Rule" and defined it as a
pair of lines positioned above and below a 10-day simple moving average of the
chart's "typical price" - i.e., ( high + low + close ) / 3. The
distance between the channel lines and the central line was defined as the
10-day simple moving average of the chart's "range" - i.e., high -
low.
This
original version of Keltner Channels was relatively easy to calculate in the
days before computers and worked pretty well for trading commodities. As time
passed, other channel systems - such as Bollinger Bands - became more popular.
In the 1980s, Linda Raschke introduced a newer version of Keltner Channels that
was based on the Exponential Moving Average and the Average True Range (ATR)
indicator. StockCharts.com uses this more modern version of Keltner Channels.
In
the modern version of Keltner Channels, the central line is (typically) a
20-period Exponential Moving Average. The upper and lower bands are drawn at an
equal distance from the central line. The distance is defined as a specified
multiple (typically 2x) of the ATR(10) indicator.
In
SharpCharts, the Keltner Channels take three parameters. The first one is the
period of the central EMA. The second one is the multiplier for the bands. The
last one is the period of the ATR indicator. The default parameter values are
"20,2.0,10".
In
the chart above, we've added the ATR(10) indicator below the price plot. You
can see how the Keltner Channel expands as the ATR(10) value rises and
contracts when it shrinks.