Learn How to Calculate Keltner Channel Before Your Next Trade

The Keltner Channel is a moving average band indicator whose upper and lower bands adapt to changes in volatility by using the average true range.

This guide explains what the Keltner Channel is, how it’s calculated, and what it tells you in technical analysis.

What Is the Keltner Channel?

The Keltner Channel is used to signal possible price breakouts, show trends, and give overbought and oversold readings.

How to Calculate the Keltner Channel

There are many variations to calculating the Keltner Channel, but generally, a moving average (10 or 20-period) of the typical price [(High + Low + Close)/3] is used to construct the midline.

Next, the average true range is calculated over a time period (same as midline, 10 or 20-period) and multiplied by a multiple (usually 1.5).

The calculated number is then added to the midline to form the upper Keltner Channel and subtracted from the midline to form the lower Keltner Channel.

When combined with other technical analysis indicators, Keltner Channels could be a useful tool in a trader’s arsenal.

How to Interpret the Keltner Channel

Here is a chart of gold futures that illustrates a Keltner Channel with a 20-day moving average and an average true range multiplier of 1.5.

There are numerous, sometimes contradictory, ways to interpret the Keltner Channel. One method is price breakouts outside of the Keltner Channel and another is overbought and oversold readings.

Price Breakouts

• Possible Buy Signal – When the price closes above the upper band, buy.
• Possible Sell Signal – When the price closes below the lower band, sell.

Overbought & Oversold Readings

The Keltner Channel breakout methodology could work great during the transition from range-bound, trendless markets to uptrends or downtrends.

However, during those actual trendless market periods, buying breakouts might be costly. During trendless periods, using the Keltner Channel as an overbought/oversold indicator might prove profitable.

The chart below of the Nasdaq 100 ETF (QQQQ) shows an example of a trendless market:

 

Please note, this is an example – not a recommendation.

 

• Oversold Potential Buy Signal – A trader might see a price breakout below the lower Keltner Channel band, and wait until the price closes back inside the Keltner Channel. By waiting for a close back inside the Keltner Channel, a trader might avoid getting caught in a true Keltner Channel downside breakout.

• Overbought Potential Sell Signal – With a price breakout above the upper Keltner Channel band, it might be advisable to wait until the price closes back inside the Keltner Channel. When a trader waits for a close back inside the Keltner Channel, that trader might avoid large losses by not getting caught in a true Keltner Channel breakout to the upside.

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Further Reading on Trend Indicators

These trend tools complement Keltner Channel: Andrew’s Pitchfork, Gann Fans, and Typical Price Moving Average.