Trading Crash Course | Gauging Volatility of Cryptocurrencies Using the Keltner Channels

[TL; DR]

- The Keltner Channels indicator measures the price volatility of assets.
- It helps to indicate the oversold and overbought market conditions of securities.
- Crypto traders can use the Keltner Channels’ breakouts to enter or exit trades.
- The upper and lower lines of the Keltner Channels indicator can help traders to establish support and resistance levels.

Introduction

During the last few weeks we covered various technical indicators including the Relative Strength Index, the MACD, Stochastic Oscillator and moving averages, among others. The reason for covering a broad spectrum of technical indicators is to give you the room to choose the ones you want to use. In this guide we discuss the Keltner channels indicator.

What is the Keltner channel indicator?

The lower and upper lines display the average true range (ATR) of the asset’s previous price action rather than standard deviations. In fact, the upper and lower lines are set two times the ATR, above and below the exponential moving average. Basically, the price oscillates between the top and bottom line, although there are times when it can break out of the two channels.

However, if the price crosses above the upper line or below the lower one, it is an indication that the current trend will continue or reverse.

The above diagram shows the Keltner Channels with three lines. Please note that the price line is in green and oscillates within the major channel. However, at times it breaks out of the channels as indicated at points A, B and C.

History of the Keltner Channels

Chester Keltner, a grain trader, developed the original Keltner Channels and published it in his book, How to Make Money in Commodities, in 1960. However, in the 1980s Linda Raschke revised the Keltner Channels indicator.

Presently, most people use Linda’s version which is very similar to the Bollinger Bands. The major difference is that the Bollinger Bands use standard deviations to establish the upper and lower lines while the Keltner Channels indicator uses the average true range.

Another difference between the two is that the Bollinger Bands use the simple moving average as the central line while the Keltner Channels use the exponential moving average.

How to calculate the Keltner Channels

Originally, the Keltner Channels used a 10 day period but Linda changed it to 20. Therefore, we can conclude that the default setting for the EMA, the central line, is 20 periods. However, traders can set their own periods ranging between 15 and 40.

It is also important to note that most trading platforms, including Gate.io, calculate the Keltner channels. However, let’s include a guide on how you can calculate it.

How to calculate the EMA
The first thing to note is that the exponential moving average is a type of moving average which assigns greater weights to recent data than the earlier one. Therefore, the starting point is to calculate the simple moving average (SMA) and multiply it by the EMA multiplier.

To get the simple moving average, add all the closing prices for the period and divide by the number of periods. For instance, if you are using a 14-day period, you add the closing prices for the 14 days and divide the answer by 14.

Note that the multipliers for the different time frames are fixed, although you can easily calculate them. For example, the multiplier for a 14 period is 13.33%. Nevertheless, you can calculate it using the following formula.



Once you have the SMA and the multiplier you can calculate the EMA using the next formula.

How to calculate the average true range (ATR)
There are three formulas to calculate the ATR. However, you will only use one figure out of the three answers, the largest one.

The current high minus the previous close
The current low minus the previous close
The current high minus the current low

The next step is to calculate the values of the upper and lower lines, using the following formulae.
Upper Band = EMA + (2 x ATR x multiplier)
Lower Band = EMA – (2 x ATR x multiplier)

How to use the Keltner Channels in trading cryptocurrencies

First, the Keltner Channels help traders to identify trade exit and entry points through indicating overbought and oversold market conditions. When the price moves above the upper line the assets get into an overbought market condition. Contrarily, if the price moves below the lower line it enters the oversold zone.

When the price enters the overbought zone, the traders can short sell their assets. On the other hand, if the price gets into the oversold zone, the traders can buy long. Nevertheless, it is important to get confirmation from other technical indicators and price action before selling or purchasing the assets.

Dynamic support and resistance levels
The points where the price closed above the upper line become dynamic resistance levels while the points where the price closes below the lower line act as support levels. Thus, these areas help traders to predict if the prices will continue or reverse.

The traders who use the Keltner Channel alongside other indicators or price action can, therefore, spot trade entry and exit points.


As the diagram indicates, there are channel breakouts at points A and B. So, a trader can spot a buying opportunity at point A and a selling one at B.

The centre line is also a significant pullback level. During an uptrend the price action is confined above this line. Conversely, during a downtrend, the price action concentrates below the centre line.


The market is in an uptrend since the price action is confined above the middle line. The situation is different in the next diagram where much of the price action occurs in the lower channel.


Once you click on “Keltner Channels” it will appear on the trading chart as indicated below.

The Keltner Channels indicator is now on the trading chart at Gate.io and the trader can use it as we discussed above.

Conclusion

The Keltner Channels indicator measures the price volatility of cryptocurrency and other securities. It can act as dynamic resistance and support levels. Also, it can indicate the overbought and sold market conditions of an asset, thereby helping traders to spot trade entry and exit points.



Author: Mashell C., Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.