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Keltner channel

A channel drawn a multiple of average true range above and below an exponential moving average, giving smoother bands than Bollinger Bands.

Bollinger bands squeezing and then expandingA price line between three curves: an average in the middle and a band above and below it that pinch together in the centre of the chart and then spread apart as the price runs higher.PRICE WITH BOLLINGER BANDS (20, 2)SQUEEZEupper bandpricemiddle band20-day averagelower bandbands widen asvolatility risesIllustrative prices. The bands sit two standard deviations from the average.
Bollinger bands: squeeze and expansion. The middle line is a 20-day average and the outer bands sit a set number of standard deviations away, so they measure how far price has recently been straying. When moves are small the bands pinch together; when moves grow they spread apart.

The usual construction is a 20 period exponential-moving-average with bands at 2 times atr. Because ATR is smoother than standard deviation, Keltner channels expand and contract more gradually than bollinger-bands.

That smoothness makes them better suited to trend-following use. A close outside the upper Keltner band is often treated as evidence of a directional move beginning rather than as an extreme to fade.

The comparison between the two band types is itself informative: when Bollinger Bands contract inside the Keltner channel, volatility is unusually low, which is the standard definition of a bollinger-squeeze. Neither channel forecasts direction on its own.

Related: bollinger-bands, donchian-channel, atr, bollinger-squeeze, trend-following

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