Keltner Channels

Keltner Channels are volatility bands placed above and below a moving average. Chester Keltner introduced the original version in his 1960 book How to Make Money in Commodities. The version most traders use today, popularised by Linda Bradford Raschke, uses an exponential moving average for the middle line and the Average True Range to set the band distance. The result is a smoother channel than Bollinger Bands that adapts to volatility.

The formula#

Middle line = 20 period EMA
Upper channel = EMA + 2 × ATR (10 or 20 periods)
Lower channel = EMA − 2 × ATR

Common settings are a 20 period EMA with a multiplier of 1.5 to 2 times ATR. See Exponential Moving Average (EMA) and ATR (Average True Range).

Keltner Channels vs Bollinger Bands#

Because ATR changes more gradually than standard deviation, Keltner Channels usually look smoother and more consistent in width. See Bollinger Bands.

How traders use Keltner Channels#

Trend identification#

• Channels sloping up with price holding in the upper half: uptrend.
• Channels sloping down with price in the lower half: downtrend.
• Flat channels with price crossing the middle line often: range.

Trend pullbacks#

In an uptrend, pullbacks to the middle EMA or towards the lower channel can offer entries in the trend's direction, with stops below the lower channel. This is a common Raschke style approach.

Breakouts#

A close above the upper channel after a period of flat channels can signal the start of a strong move up, because Keltner bands are wide enough that closes beyond them are unusual. Many traders use this as a momentum trigger.

Range trading#

When channels are flat, buying near the lower channel and selling near the upper channel can work, with tight risk control in case a trend begins.

The squeeze: Bollinger inside Keltner#

A well known setup combines both indicators. When Bollinger Bands contract so much that they move inside the Keltner Channels, volatility is very low relative to the average range. This "squeeze" often precedes a powerful breakout. Traders wait for the Bollinger Bands to expand back outside the Keltner Channels and trade in the direction of the breakout, often confirmed by a momentum indicator. See Compression and Expansion.

Settings to experiment with#

A simple Keltner trend routine#

On a daily chart, check that the channel slopes in your intended direction and that price has spent most recent days in the half of the channel nearest that direction. Wait for a pullback to the middle EMA, look for a candle that closes back in the trend's direction, and place a stop just beyond the opposite channel line. Take partial profits near the outer channel and trail the rest along the middle line.

Common mistakes#

• Fading every upper channel touch in a strong trend.
• Mixing up Keltner and Bollinger signals; their bands mean different things.
• Using very tight multipliers that turn every candle into a "breakout".

Frequently asked questions#

What are Keltner Channels?#

Volatility bands set a multiple of the Average True Range above and below an exponential moving average.

How are Keltner Channels different from Bollinger Bands?#

Keltner Channels use ATR around an EMA; Bollinger Bands use standard deviation around an SMA. Keltner Channels are generally smoother.

What is the Keltner squeeze?#

A setup where Bollinger Bands contract inside Keltner Channels, signalling very low volatility that often precedes a breakout.

Sources#

• Wikipedia, Keltner channel