Keltner Channel indicator is a very popular among traders as a technical indicator. Traders are using this to assess the stock or commodity’s trend. It can spot potential reversal points and also can provide trade signals. It is also a volatility-based envelope set above and below an exponential moving average.
This indicator is similar to Bollinger Bands, which use the standard deviation to set the bands. In using the standard deviation, Keltner Channels use the Average True Range (ATR) to set channel distance. The channels are typically set two Average True Range values above and below the 20-day EMA. The default period of Keltner Channel in Zerodha Kite is 50 and shift is 5. This channels can also be used to identify overbought and oversold levels when the trend is flat. Chec the image below to understand how we attached this on Reliance Industries share price chart.
Keltner Channel indicator was first introduced by Chester Keltner in the 1960s. Linda Bradford Raschke in the 1980s updated this indicator and this later version of the indicator is the one traders now use. This indicator are useful because it can make the trend more visible. When a stock or commodity is trending on the upside, it should regularly touch the upper band and even move past the upper band on several occasions. The price should also stay above the lower band, and will often stay above the middle band or barely dip below it. In this indicator when a scrip is trending on the downside, it should regularly touch the lower band and even breach it on several occasions. The price should also stay below the upper band, and will often stay below the middle band or barely push above it.
The general strategy of this indicator is to buy during an uptrend when the price pulls back to the middle line. Then place a stop loss about half way between the middle and lower band, and place a target near the upper band (stop loss and target are set at the time of the trade). Other is short sell during a downtrend when the price rallies to the middle line. Then place a stop loss about half way between the middle and upper band, and place a target near the lower band.
Keltner Channel Indicator is trend following indicator which identification of trend is more than half the battle. The trend can be up, down or even flat. In this indicator, traders and investors can identify the trend to establish a trading preference. Bullish trades are favored in an uptrend and bearish trades are favored in a downtrend. However, in all analysis, it is better to use Keltner Channel indicator in conjunction with other indicators and analysis.