Keltner Channel: What is it?

The Keltner Channel technical indicator was developed by Chester W. Keltner in 1960 and first introduced in his book How to Make Money in Commodities. Later Linda Bradford Raschke published modifications for the Keltner Channel providing more data analysis. Today this variant of indicator is used in trading.

Formula

Trading use

Keltner Channel trend indicator has a similar structure to Bollinger Bands, Donchian Channel, Silver Channel and other indicators that operate with price extremes.

Both sell and buy signals in this indicator are generated by the prices that moved within the channel for a long period of time and broke out. Therefore, the best moment to enter the market at breakout is the situation where the candle body, which gave the signal, completely covers the upper or lower bands of Keltner Channel. In this case the trader can avoid many false signals. The size and shape of the candle body are not important. The whole candle body should intersect the channel.

One of the conditions of effective trading with Keltner Channel is to use higher timeframes. The number of false signals in lower timeframes increases at breaking out the channel bands. In order to remove the negative effect, it is recommended to use this technical indicator above H1 timeframe.

An important requirement for Keltner Channel is filtering signals generated during the price channel breakout. In this context, the indicator should be thoroughly tested in order to select the best filtering method. However, one of the best options is to use it with a well-known trend strength indicator ADX:

• A trader should buy when the breakout signal of the upper channel's band occurs with ADX above level 30;
• A trader should sell when the breakout signal of the lower channel's band occurs with ADX above level 30.

Keltner Channel indicator is less effective to determine the moment of closing positions, so it is recommended that the trader use it as a benchmark for opening positions.