Keltner Channels

Notes:

These indicators and concepts are specifically designed for TradingView.com

Overview

Keltner Channels are a technical analysis tool used by traders to identify potential trends in the market. The channels are based on a moving average and a measure of the average true range of prices.

How to Trade

There are different ways to trade using Keltner Channel but here are a few popular strategies:

1. Breakout Strategy: In this strategy, you would look for a breakout above the upper Keltner Channel line as a potential buy signal, or a breakout below the lower Keltner Channel line as a potential sell signal. To confirm the breakout, you may use other technical indicators such as momentum oscillators or volume indicators. You would enter the trade once the breakout is confirmed and set your stop loss below the breakout level.
2. Trend-Following Strategy: In this strategy, you would use the Keltner Channel as a tool to identify the prevailing trend. If the price is consistently trading above the middle line, it may indicate an uptrend, and you could look for buying opportunities when the price touches the lower Keltner Channel line. Conversely, if the price is consistently trading below the middle line, it may indicate a downtrend, and you could look for selling opportunities when the price touches the upper Keltner Channel line. You would exit the trade when the price crosses the middle line or reaches the opposite Keltner Channel line.
3. Mean Reversion Strategy: In this strategy, you would look for instances where the price moves too far away from the middle line, and bet on a reversion to the mean. For example, if the price touches the upper Keltner Channel line and then retreats, you could enter a short trade with a target of the middle line. Similarly, if the price touches the lower Keltner Channel line and then bounces, you could enter a long trade with a target of the middle line. You would set your stop loss beyond the opposite Keltner Channel line.

How to Calculate

The Keltner Channels are calculated using a combination of a moving average and the average true range (ATR). Here are the steps to calculate the Keltner Channels:

1. Calculate the middle line: The middle line is typically a 20-period exponential moving average (EMA) of the closing prices of a security. To calculate the EMA, you would add up the closing prices of the last 20 periods and divide by 20. Then, you would apply a weighting multiplier to give more weight to the most recent prices. The formula for the EMA is:

EMA = (Close - EMA(previous)) x multiplier + EMA(previous)

where:

• Close is the current closing price
• EMA(previous) is the previous period's EMA
• multiplier = 2 / (n + 1), where n = the number of periods (in this case, 20)

2. Calculate the average true range (ATR): The ATR is a measure of volatility that takes into account the range of price movements in a security over a given period of time. To calculate the ATR, you would first calculate the true range for each period. The true range is the greatest of the following three values:

• The difference between the high and low of the day
• The absolute value of the difference between the high of the day and the previous day's close
• The absolute value of the difference between the low of the day and the previous day's close

Then, you would calculate the average of the true ranges over a set number of periods. The formula for the ATR is:

ATR = Average True Range over n periods

where n is the number of periods used to calculate the ATR.

3. Calculate the upper and lower Keltner Channel lines: Once you have calculated the middle line and the ATR, you can calculate the upper and lower Keltner Channel lines. The upper Keltner Channel line is typically set at two times the ATR above the middle line, while the lower Keltner Channel line is set at two times the ATR below the middle line. The formulas for the upper and lower Keltner Channel lines are:

Upper Keltner Channel Line = EMA + (ATR x 2)Lower Keltner Channel Line = EMA - (ATR x 2)

Note that some traders may use different multipliers or time periods to calculate the Keltner Channels, depending on their preferences and trading style.