Keltner Channels: A Unique Approach to Identifying Overbought and Oversold Conditions

By:  Ivan Cavric 


Keltner Channels is a popular technical indicator that can be used to identify overbought and oversold conditions in the market. It was developed by Chester W. Keltner in the 1960s and is based on the principle of using a moving average and a range-based calculation to create upper and lower bands around price action.

The Keltner Channel consists of three lines:

  1. The middle line, which is a moving average of the price action.
  2. The upper line, which is calculated by adding the average true range (ATR) of the instrument to the middle line.
  3. The lower line, which is calculated by subtracting the ATR from the middle line.

The ATR is a measure of volatility and is calculated by taking the average of the true range over a specified period. The true range is the greatest of the following:

  • The difference between the current high and the previous close.
  • The difference between the current low and the previous close.
  • The difference between the current high and the current low.

By creating upper and lower bands around the moving average, Keltner Channels provide a visual representation of the current trading range of an instrument. When prices are trading above the upper band, it may suggest that the instrument is overbought, and when prices are trading below the lower band, it may suggest that the instrument is oversold.

Traders can use Keltner Channels in a variety of ways. One common approach is to look for potential trading opportunities when prices move outside of the bands. For example, when prices move above the upper band, it may suggest that the instrument is overbought and due for a pullback, while prices moving below the lower band may suggest that the instrument is oversold and due for a bounce.

Traders can also use Keltner Channels in conjunction with other technical indicators and trading strategies. For example, some traders may look for a confluence of signals, such as a price moving outside of the upper band and an overbought signal from an oscillator like the RSI.

Keltner Channels is a unique and powerful technical indicator that can be used to identify overbought and oversold conditions in the market. Traders can use it as a standalone indicator or in conjunction with other tools to find potential trading opportunities. As with any technical indicator, it's important to remember that Keltner Channels are not foolproof and should be used in conjunction with your own analysis and trading strategy.

Location: Welland, ON, Canada

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