- The Keltner Channel is a technical indicator used to analyse the stock market.
- It comprises three separate lines used to analyse the price volatility.
- The middle line is an exponential moving average (EMA) of the price.
- The above line is set two times the average true range (ATR) above EMA.
- Similarly, the lower line is set two times the ATR below the EMA.
- Most of the time, the price ranges between the high and the low prices.
- If the price crosses above the upper line or below the lower line, there is a high possibility of a trend reversal.
- In few cases, it is because of the acceleration of the trend.
Formulae for Keltner Channel:
- Middle Line = EMA of 20 periods
- Upper Line = EMA + (2*ATR)
- Lower Line = EMA – (2*ATR)
Where, EMA is calculated using
in most of the cases, N = 10
ATR is calculated using
Highest of the three values
- Select the N value around 10 or 20 because if the value exceeds beyond this, the indicator becomes a highly lagged indicator.
- At the same time, if the value is too small, the lines are closer to each other and the price crosses out of the bands frequently.
This is the 1 day chart of United Breweries Ltd (BSE) around Jan-July, 2020
- A rising channel indicates that the price is rising. Similarly, if the channel is falling, it indicates that the price is falling. This is clearly depicted in the above image.
- If the price breaks above the upper line, it indicates a strong upward trend and if the price breaks below the lower line, it indicates a strong downward trend.
- If the price fluctuates between the upper and the lower bands, it indicates a weak trend.
- If the price continuously hits the lower line and suddenly it hits the upper line, it indicates the end of the downward trend. Traders can enter the market and initiate their long positions. If they are already in the rally, they can initiate short coverings.
- Similarly, if the price hits the upper line continuously and hits the lower line suddenly, it indicates the end of the upward trend. Traders can enter the trade and initiate their short positions. If they are already in the rally, they can initiate long unwinding.
- The main disadvantage of this indicator is it indicates many calculations. The traders need to be experienced in order select the appropriate number of periods.