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| Keltner Channels (KCs) |
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| Written by Kimball Hall | |
| Wednesday, 19 November 2008 | |
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Keltner Channels are perhaps one of the least understood indicators--specifically for those that are so easy to calculate. The origin of the KCs are generally attributed to Chester W. Keltner. But the fact is: Moving Average Envelopes have been used since the beginning of technical analysis. The Channel is made up of three lines, 1. Center Line, calculated as SMA(14) (L + H + C )/3 2. Two outside lines calculated at some distance away from the centerline. The outside lines are usually constructed using the Average of the same periods trading average. Although this is usually the way the channels are constructed, there are an infinite number of possibilities one could use to construct tem. Popular variations use the ATR to place the outside lines, using EMA’s and WMA’s to create the center line.  In the above example, the center line is a 14 day SMA. The outside lines are created using a +/-14 day ATR. The general consensus is that they should be used to identify trends, and then we should follow them. Others also trade the closes above and below the outside bands as overbought and oversold. For this reason, other tools should be incorporated into the analysis of the KCs In the following example, the strong nature of the ADX confirmed a move lower as a price broke out of the bottom KC line. Another move ended overbought previously in the day before when divergence appeared between the RSI and the price action. This example comes from the USD/JPY on 11/10/2008 and 11/11/2008 
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