Keltner Channels

Keltner channels help you identify market trends. Keltner channels compare today’s prices with yesterday’s prices. An absence of new highs indicates a downtrend. An absence of new lows indicates an up trend. In conjunction with this method of trend identification, the Minor-Trend Rule is used. The Minor Trend Rule states that the minor trend is bullish if the daily trend sells above its most recent high: conversely, the minor trend is bearish if the daily trend sells below its most recent low.

A Keltner channel study consists of a moving average and two channel lines. The channel lines are drawn by adding to and subtracting from the current moving average value the product of a constant multiplied by the average true range of each bar.

Formula:

Center Line:

Where:

CL = center line

EAVG = exponential moving average

n = number of bars

P = price

And:

Average True Range:

Where:

ATR = average true range

R = range

n = number of bars

H = high

L = low

And:

Upper Channel Line:

Where:

UP = upper channel value

CL = center line

ATR = average true range

C = constant

And:

Lower Channel Line:

Where:

DN = lower channel value

CL = center line

ATR = average true range

C = constant

Parameters

Parameter

Function

Avg. Type

Sets the type of calculation for the moving average:

Option	Function
Exponential	Exponential moving average.
Hamming	Hamming moving average.
Modified	Modified moving average.
Simple	Simple moving average.
Weighted	Weighted moving average.

Color

Default color for the center line is green; lower channel defaults to cyan; upper channel defaults to violet. To change the color, click on the color button:

Then choose the color you want from the Color Menu.

Graph

Sets the drawing method for the study.

Option	Function
Bars	Renders the study as bars.
Dots	Renders the study as dots.
Dotted	Renders the study as dots.
Histogram	Renders the study as a histogram drawn from 0.
Line (Default)	Renders the study as a line.
Not Drawn	The study is not rendered.

Line Style

Sets the rendering technique of the graph parameter (if it is set to Line).

Option	Function
Dash-Dot	--l-l-l-l-l-l-
Dash-Dot-Dot	----ll----ll----
Dashed	- - - - - - - - - - - - - - -
Dotted	llllllllll
Solid (Default)	-------------------------

Line Width

Sets the tickness of the study line.

Option	Function
1 pixel (Default)
2 pixels
3 pixels
4 pixels
5 pixels

Multiplier

Period

Price

The price on which the study is calculated:

Option	Function
Close	Closing price (Default).
First Study	Calculates the study using the values of the first study in the window.
H, L Midpt	Calculates the study on the mid-point of the high and low.
H, L, C Avg.	Calculates the study on the average of the High, Low, and Close.
High	High price.
Low	Low price.
Open	Opening price.
Tick Average	Calculates the study on the average of ticks in the period.

Notes

The Keltner channel technique, which was first presented in 1960, is not generally as well known as other channel methods.

The Keltner Channels overlay is a member of the "envelope" class of studies. Envelopes consist of three lines, a center line and two outer bands. Envelope theory holds that price has the greatest probability of falling within the boundaries of the envelope. Prices falling outside the envelope boundaries are considered anomolies. The major differences between envelope types can be found in the calculation of the lines, in the spacing between the lines or bandwidth, and how they are interpreted.

see, Chester W. Keltner, How to Make Money in Commodities, Kansas City, MO: The Keltner Statistical Service, 1960; see also, Perry J. Kaufman, The New Commodity Trading Systems and Methods, New York: John Wiley & Sons, 1987.