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Chester’s very own volatility indicator is called Keltner channel

In 1960, there was a grain trader with the name Chester Keltner. He wrote a book called “How to make money in Commodities,” which explains and introduces a volatility indicator named after himself, Keltner channels.

In the 1980s, a person named Linda Raschke revised Keltner channels and made an improved version. People who use Keltner channels will usually prefer Linda’s version more than the original.

Linda’s version

If you are aware of Bollinger bands, you will notice that they have a few similarities, mainly because they both have three lines. Bollinger bands have upper bands, lower bands, and a middle line. The upper bands and lower bands are standard deviations, and the middle line would be a moving average — SMA, to be specific. On the other hand, Keltner channels also have three lines: two outer and middle lines. The middle line is an EMA. When we say EMA, we mean exponential moving average. The two outer lines are average true range or ATR instead of standard deviations. Being derived from a volatility indicator, which is the average true range, Keltner channels also expands and contracts with volatility but not like how Bollinger bands contracts and expands. Both Bollinger bands and Keltner channels look for price sensitivity and indicator smoothness.

The essence of Keltner channels

Keltner channels are helpful when we set entry and exit. Through their help, we can also identify levels of overbought and oversold related to a moving average — mostly especially on a flat trend. We can also discover clues about new trends. This channel is like an ascending or descending one. The only difference is that it adjusts according to the latest volatility and is not composed of straight lines.

Forex trading and Keltner channels

Keltner channels help us identify where the currency pairs are usually seen. Mostly, the channel top will hold dynamic resistance, while the channel bottom will serve as the dynamic support.

Keltner channels and dynamic support and resistance levels

If you use Keltner channels often, you may have noticed that the settings are very usual. For the upper and lower line, we have 2X ATR(10) and EMA (20) for the middle line. The middle line holds a significant role in Keltner channels because it may act as a pullback level where there are current trends.

  • During uptrends. The channel’s upper half tends to become the price action’s confinement. We can find the upper half between the middle and top lines where the middle line acts as support, and the top line acts as resistance.
  • During downtrends. The channel’s bottom half tends to be the price action’s confinement when it looks for resistance at the middle line and support in the bottom line.
  • During ranging market. The price will usually go up and down between the top lines and bottom lines.

Keltner channels and breakouts

If the breakout comes from the Keltner channels, then you might pick up vital clues where the price will go next. Furthermore, if the candles breakout higher than the top, the move will most likely go up continuously. If the candles break out lower than the bottom, then the price will most likely go down continuously.

To cap it off

Keltner channels help us in many aspects such as setting entrance and exit, spotting overbought or oversold levels, learning clues about new trends. Let us make sure to put everything to our advantage to become successful and profitable traders.

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