Understanding the Keltner Channel Indicator

Numerous strategies, tools, and even bots are employed in crypto trading. A typical trading strategy is to apply a technical indicator to identify price trends in crypto markets. One such indicator is Keltner Channels. Developed in the 1960s, this versatile tool, now updated for modern markets, is a valuable asset for traders of all experience levels, helping them identify trends and manage risk.

This article briefly explains the Keltner channel indicator and how to use it on the Gate trading platform.

What is the Keltner Channel?

The Keltner Channel is a technical analysis tool that helps traders spot volatility in an asset’s price, identify upward and downward price trends, and make informed trading decisions. Developed by American grain trader Charles Keltner, it is a volatility-based tool comprised of three main lines: a central moving average and envelope indicators.

The Keltner channel is most common among forex, stock, and crypto traders who want to determine whether a price trend is upward, downward, or sideways. The modern Keltner channel is based on an exponential moving average, which is the middle line and an average true range.

The Keltner channel indicator has been described as an alternative to Bollinger Bands, another volatility-based tool that works as an enveloping indicator. However, there are some differences between the two tools. First, Bollinger bands have a higher envelope range and use standard deviation to calculate the distance instead of the average true range, which is the case with the Keltner channel.

History of the Keltner Channel Indicator

Keltner Channel Signals first emerged in the 1960s. They were propagated by Charles Keltner, an American grain trader who wrote about how to use the signals in his book “How to Make Money In Commodities.” Charles Keltner’s version of the strategy reflected the times he was in, and so was a simple strategy involving a ten-day moving average with the center line showing the typical price of the commodity.

Reading and applying Keltner’s original version was just as simple; where the closing price fell above the top line, it was regarded as a bullish signal, and where it fell below the lower lie, it was considered bearish.

However, the Keltner Channels evolved thanks to Linda Bradford Raschke, who updated the original signals by adding an exponential moving average (EMA), an average true range (ATR), and different averaging periods. These improvements have been widely accepted by the trading community and are used jointly as part of the Keltner Channels today.

How To Calculate the Keltner Channels

Calculating the Keltner channel is simple when you consider that there are three lines and a different calculation for each line. The Keltner channels are calculated as follows:

Middle Line: EMA (typically calculated over 20 periods)

Upper Line: EMA + (2 * ATR)

Lower Line: EMA - (2 * ATR)

EMA represents the exponential moving average calculated over 20 periods, and ATR represents the average true range over 10 - 20 periods.

Trading With the Keltner Channel

Regarding trading, there is no one-size-fits-all strategy or surefire indicator that guarantees profitable trading. For most traders, the preferred option is to have a well-thought-out strategy involving one or more reliable technical indicators.

With the Keltner Channel Indicator, the first thing to know is that it is a lagging indicator, so the moving average lags behind the price. There are different ways to use the Keltner channel indicator, including the following.

Overbought and Oversold Conditions

Overbought and oversold conditions are simply market conditions that arise from traders reacting to news, earnings releases, and other events that impact the trading market. These signals depend on the price of an asset and its fair value. So, an overbought condition is what happens when there is a consistent bullish trend such that the trading price of the asset is higher than it’s worth. For oversold conditions, the reverse is the case, so it is what happens when an asset is trading below its actual value.

When noting overbought and oversold conditions with the Keltner channel indicator, traders must look for consistent bullish signals. A signal is considered bullish when the asset’s price breaks above the upper line of the Keltner channel indicator, which can point to an overbought condition.

In an oversold condition, the asset’s price will break out of the lower band of the indicator to show a bearish price trend.

How to Use Keltner Channel Indicator

The Keltner Channels Indicator is a technical analysis tool on trading platforms. Gate.io, a centralized cryptocurrency platform, has the Keltner channels built to indicate its spot and future markets. To use the Keltner channels indicator on Gate, follow the following steps:

1. Log in to Gate.io and click “Trade” on the Menu Bar above.

1. On the trading view, click the technical indicator icon.

1. Search “Keltner channels” in the list of indicators and select

1. The Keltner channels will apply to your current chart, and you can edit or change the trading periods according to your strategy.

Keltner Channel vs Bollinger Bands

Keltner Channels are often confused with Bollinger Bands, another technical analysis tool. Bollinger bands, like its counterpart, is a volatility-based indicator that performs a similar function of identifying entry and exit points. Despite the similarities, a few factors set the two indicators apart.

The first factor that differentiates the two indicators is how they are calculated. Bollinger bands rely on standard deviation to determine price volatility. Meanwhile, the Keltner channels use an ATR to measure volatility, creating dynamic channel boundaries.

Visually, Bollinger bands and Keltner Channels don’t have that many differences, except that the Keltner channel has three lines. At the same time, Bollinger Bands replaces the middle line with a red line distinct from the upper and middle lines.

Finally, Bollinger bands are considered more sensitive to price action because they use standard deviation. So, short-term price spikes can be represented with bands with large widths. On the other hand, Keltner channels present a smoother picture of asset volatility, allowing traders to focus on clear trend signals.

Conclusion

To summarize, Keltner channels, like any other technical indicator, are not 100% accurate. The indicator is derived mathematically from price, and its results will vary depending on the trading period selected, the asset volume, and may even present false signals in markets with low volatility.

When applying a technical indicator to a trading strategy, it’s best to use it with other indicators like the Relative Strength Index or as a signal within a larger trading strategy, such as a breakout strategy. Trading is a risky venture, so it’s advised that you carry out extensive research and exercise caution.