Keltner Channels Or Keltner Bands - Why Traders Use Them As Reliable Indicators

Trading Keltner Channels

Using the right indicators which fit trading style and personality is a very important element of any trader’s system used to capitalize on market moves. Keltner Channels, also commonly known as Keltner Bands, have proven to be an exceptional trend following indicator when incorporated into a trading system. Keltner channels use a set up of three lines which reside on the charting screen floating over the candlesticks or bars. The upper and lower lines determine the perimeter of current price action, with the middle line being a moving average.

Keltner Channels History

Originally developed by Chester H. Keltner in 1960’s I what he referred to as a “10 Day Moving Average Trading Rule”, the upper and lower lines are actually the Keltner Channels or Keltner Bands which form above and below a middle line which is his ten day simple moving average. The distance between the Keltner channel lines and the middle line is the 10 day moving average and range of the chart.

Since their introduction in the 1960’s, Keltner channels have been tweaked and are more commonly employed using a twenty day exponential moving average rather than the standard ten day moving average. Most charting software now defaults to the 20 day EMA and the ATR or Average True Range Indicator.

Keltner Bands Trading Strategy

The lines above and below the median moving average line in the center of the channel. When using Keltner Bands as trading strategy, a close above the upper band is generally regard as bullish signal and longs may consider opening positions. When closing below the lower band the trader should consider the general mood of the market to be bearish and short traders appear to be prevailing. However, some traders utilize other indicators in tandem with Keltner Bands in for reasons of confirmation.

Keltner Channels And The Average True Range

The average true range or ATR is determined by taking the range of a stock or future contract over a set number of previous trading time frames. Shorter time frames will not produce sufficient enough true information to determine current market conditions and why most traders use at least 10 day or 14 day time frames to determine average true range. When the ATR is used in conjunction with Keltner Channels, most market noise is removed and the trader usually has a more clear picture and can often successfully predict market direction and take appropriate steps to capitalize on these market moves.