What is a 'Keltner Channel'

A Keltner Channel is an envelope channel used in technical analysis to chart bands around security price candlestick patterns. It includes a moving average center line and two boundary bands. The trendlines are constructed from two ten-day moving averages of different varieties.

BREAKING DOWN 'Keltner Channel'

Keltner Channels were introduced by Chester W. Keltner in his 1960 book “How to Make Money in Commodities.” Keltner Channels are typically an alternative channel pattern used in conjunction with signals from standard envelope channels such as Bollinger Bands or Donchian Channels. Different variations for calculating the trendlines in a Keltner Channel have also been generated due to market modifications since the original Keltner Channels were introduced.

Keltner Channel Construction

Keltner Channels begin with a center trendline drawn from a ten-day moving average that considers the high, low and closing price for the day.

Center trendline: This trendline is a ten-day moving average of each day’s (High + Low + Close) / 3. 

The upper and lower bands are drawn using trendlines that are based on the difference between the security’s ten-day moving average high minus low price for a single day.

Upper band: The upper band is drawn from the ten-day moving average of each day’s high minus low.

Lower band: The lower band is the inverse of the ten-day moving average of each day’s high minus low.

See also: Discovering Keltner Channels and the Chaikin Oscillator

Keltner Channel Trading Signals

Using the designated upper and lower bands generates a relatively thinner channel than other comparable envelope channels. Thus, the signals for this channel can vary slightly from standard methodology. Generally, traders will want to buy when a price reaches its lower band (also known as the support level) and sell when it reaches its upper band (also known as the resistance level). With a Keltner Channel, traders tend to watch for movement beyond the resistance and support lines to indicate a trading signal. Thus, a candlestick pattern moving substantially above the resistance trendline is a sign to sell and a candlestick pattern moving substantially below the support line is a sign to buy.

Keltner Channel Variations

The methodology above is the standard for most Keltner Channels however it is important that traders understand how their technical system is charting Keltner Channels. This channel’s methodology has been modified since its introduction to include some different variations. Some Keltner Channel calculations will include a center trendline drawn from an exponential moving average with upper and lower trendlines drawn using the average true range.

RELATED TERMS
  1. Trading Channel

    A trading channel is a channel drawn on a security price series ...
  2. Buy Weakness

    Buy weakness is a proactive trading strategy in which a trader ...
  3. Channel

    A channel may refer to a distribution system for businesses or ...
  4. Price Channel

    A price channel is used in technical analysis to chart the price ...
  5. Saucer

    A saucer is a technical charting pattern that forms when a security’s ...
  6. Trending Market

    A trending market is a market that is trending in a specific ...
Related Articles
  1. Trading

    Discovering Keltner Channels and the Chaikin Oscillator

    It's time to acquaint yourself with some lesser-known yet effective technical indicators.
  2. Trading

    Trading Volatile Stocks With Technical Indicators

    Short-term traders seek volatility because of the profit potential. Discover how to find volatile stocks and use technical indicators to trade them.
  3. Trading

    Moving Average Envelopes: Refining A Popular Trading Tool

    Traders can benefit from experimenting with envelopes, which help spot trends after they develop.
  4. Trading

    Channeling: Charting a Path to Success

    Learn how to trade channels, a chart pattern that tells you where to enter, where to exit and even how long the trade may take.
  5. Trading

    Buy These Stocks on The Pullback (LEN, FNF)

    These four stocks are in upward sloping trend channels and have recently pulled back toward the bottom of the channel, providing a buying opportunity.
  6. Trading

    Rising Trend Channel Buying Opportunities

    These two stocks are in long-term rising price channels. Currently trading near support, an upside move indicates another wave higher.
  7. Trading

    Rising Trend Channel Breakouts - Acceleration Or Top?

    These stocks have been within rising trend channels, but recently have broken the trend channel to the upside. Such a breakout usually signals two potential outcomes: an acceleration of the trend ...
  8. Trading

    Organize Price-Band Relationships In Bollinger Bands®

    Bollinger Bands have become an enormously popular market tool since the 1990s but most traders fail to tap its true potential.
  9. Trading

    The Basics Of Bollinger Bands®

    This strategy has become one of the most useful tools for spotlighting extreme short-term price moves.
RELATED FAQS
  1. How do traders and analyst create profitable Swing Trading strategies in forex?

    Learn how to create a profitable swing trading strategy in the forex market using price channels on bullish, bearish and ... Read Answer >>
  2. What are the top technical indicators used for range-bound trading strategies?

    Learn how to identify when a market is range-bound and what some of the technical indicators are that work best for trading ... Read Answer >>
  3. How do I create a trading strategy with Bollinger Bands® and the MACD?

    Learn how to establish profitable trading strategies using technical trader favorites such as Bollinger Bands and the moving ... Read Answer >>
  4. What are the main advantages of using Moving Averages (MA)?

    See why moving averages have proven to be advantageous for traders and analysts and useful when applied to price charts and ... Read Answer >>
  5. What are the differences between a bar chart and candle sticks?

    Explore the difference between bar and candlestick charts. Learn how technical analysts use charts in the analysis of supply ... Read Answer >>
  6. Which market indicators reflect volatility in the stock market?

    Learn the most commonly used technical indicators of stock market volatility that are watched by stock market traders and ... Read Answer >>
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center