Keltner
Definition
The Keltner Channel is a moving average band indicator based on the theory of averages, similar to Bollinger Bands but with different calculation methods. It uses the price range to plot a channel to assess market trends and volatility. Compared to Bollinger Bands (BOLL), the Keltner Channel is smoother.
It consists of three lines: the upper band, middle band, and lower band. The middle band is the user-defined moving average over a specified time period, typically a simple moving average (SMA) or exponential moving average (EMA). The upper and lower bands are set at a certain distance from the middle band, which is customizable by the user. This distance can be set as a multiple of the daily high/low range or, more commonly, as a multiple of the Average True Range (ATR).
Components and Calculation of Keltner Channel
The Keltner Channel forms a channel with three lines (middle, upper, and lower), each representing:
Middle Channel: User-defined moving average over a specific time period.
Middle Channel = MA
Upper Channel: Value derived by adding n times the ATR to the middle band.
Upper Channel = Middle Channel + ATR * n
Here, n is a multiplier used to adjust the width of the Keltner Channel.
Lower Channel: Value derived by subtracting n times the ATR from the middle band.
Lower Channel = Middle Channel - ATR * n
Parameters of the Keltner Channel
Keltner Period: Number of candlesticks used to calculate the Keltner Channel, including price data for calculating moving averages and ATR.
Keltner Width: Used to multiply with the Keltner Channel to scale the width of the upper and lower bands.
Moving Average: Supports selection of different types of moving averages, currently offering six types including SMA, EMA, WMA, DEMA, TEMA, and TRIMA. Each type of MA smoothes price data to varying degrees.
How to Use the Keltner Channel?
Open Long : when the price breaks above the upper Keltner Channel.
Open Short : when the price breaks below the lower Keltner Channel.
Advantages and Disadvantages of the Keltner Channel
Advantages:
Quick Response to Trend Changes: Responds quickly to changes in trends.
Effective in Range-Bound Markets: In most cases, prices oscillate within the channel range, making the Keltner Channel's price breakthrough interpretation very useful during narrow range oscillations.
Disadvantages:
Signal Lag: The indicator signals can be delayed due to its reliance on moving averages. In highly volatile markets, signal responsiveness may lag behind price movements.
Suitability for Volatile Markets: The Keltner Channel is suitable for markets with significant price fluctuations. In markets with low volatility or prolonged consolidation phases, the upper and lower ranges of the channel may be too close to the middle band, making it difficult to determine market trends.
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