Volatility-based Keltner Channel Oscillator, which also utilizes moving averages to identify key levels, has gained an important place in trading strategies today. The oscillator, often preferred due to the different and diverse insights it provides, is also of great importance for traders to understand market dynamics. Through this comprehensive guide we have prepared for you, you can find all the information about the definition of the Keltner Channel Oscillator, how it works, how its calculations are performed, and how it is included in trading strategies.
What Is The Keltner Oscillator?
Keltner Channels refer to a volatility-based channel defined above and below the exponential moving average. Although the Keltner Channel is similar to Bollinger Bands, the calculation of the ranges within the channel is based on the average true range (ATR), not the standard deviation. Typically, two Average True Range values above and below the 20-day EMA are used to form the channels. With the Keltner Channel Oscillator, traders can interpret the ongoing price movements of their financial asset of interest, from the current trend to overbought and oversold areas.
How Does The Keltner Channel Oscillator Work?
Three different elements make up the Keltner indicator, which are the upper band, the lower band, and finally the middle line. Technical indicators such as Keltner Channels, Bollinger Bands (BB), and Moving Average Envelopes (MAE) are called Envelopes, expressed between the upper and lower band lines.
The moving average of a predetermined time, usually 20, forms the middle line. Although the moving average used is the Exponential Moving Average, developed by Linda Bradford Raschke in 1980, sometimes traders may also use the original Simple Moving Average.
The timeframe of the used moving average can vary depending on the individual’s trading strategy. The longer the number of EMA days used in Keltner Channels, the later the Keltner Channels will form, giving traders delayed signals.
Why Is The Keltner Channel Oscillator Important?
Keltner Channels can provide traders with a wide range of insights into the financial asset of interest thanks to its many signals. Traders can use Keltner Channels to measure volatility, identify the current trend, mark potential support/resistance zones, and make more informed trading decisions.
On the other hand, when volatility rises excessively, such as when bands break, traders can identify possible trend reversals with the support of other technical indicator tools. Traders can take action by using the right trading strategy with the data they obtain.
How Is The Keltner Channel Oscillator Calculated?
The formula used to calculate the Keltner Channel Oscillator is as follows:
Keltner Channel Middle Line=EMA
Keltner Channel Upper Band=EMA+2∗ATR
Keltner Channel Lower Band=EMA−2∗ATR
where:
EMA=Exponential moving average (typically over 20 periods)
ATR=Average True Range (typically over 10 or 20 periods)
The following method is followed in the calculations for the Keltner channel:
1- Firstly, the EMA value of the financial asset is determined based on the preferred day of use.
2- Then, the ATR value of the same financial asset is determined based on the preferred day of use.
3- Although the ATR value obtained varies depending on the investor, it is usually multiplied by 2 and the upper band of the Keltner Channel is determined by adding the previously obtained EMA value.
4- Although the ATR value obtained varies depending on the investor, it is usually multiplied by 2 and subtracted from the previously obtained EMA value to determine the lower band of the Keltner Channel.
How To Use Keltner Channel in Trading?
Since Keltner Channels provide information on many aspects of price movements of financial assets, they can be used in different investment strategies.
The first strategy in which Keltner Channels can be used is breakouts. A breakout is when prices exceed the upper or lower bands of the Keltner Channels as volatility increases. Breakouts can mean different things. When not supported by other indicators, temporary volatilities can mislead traders by giving the impression of trend changes when in fact they represent overbought or oversold zones. On the other hand, when market conditions are favorable, the trend may be reversed and traders need to adjust their strategies. For these reasons, Keltner Channels should always be used in conjunction with other indicators and the data obtained should always be confirmed.
In trading, Keltner Channels can also be used in different ways. In the presence of a strong trend, momentary pullbacks can be a buy signal for traders. Traders with the attitude that the price will always be within the Keltner Channels consider the band levels as a signal. However, it should be remembered that Keltner Channels have lagging data and every decision should be confirmed by other technical indicators.
What Are The Advantages Of The Keltner Channel?
As a volatility-based technical analysis tool, Keltner Channels offer traders many advantages:
- Volatility Measurement:
Average True Range, which is also used in the calculations of Keltner Channels, helps traders measure volatility in current market conditions. By determining the level of volatility, users can adjust their risk management and change their portfolio allocations accordingly.
- Understanding the Market Trend:
Keltner Channels also show traders the trend of the financial asset of interest. In an uptrend, the price is expected to be above the middle line of the Keltner Channels, while in a downtrend, price movements below the middle line are expected.
- Overbought and Oversold Conditions:
When volatility is extremely high, the price may move away from the middle line of the Keltner Channels. Such price movements may indicate that the financial asset of interest is in overbought or oversold zones and may contain trading signals for investors.
What Are The Disadvantages Of The Keltner Channel?
As with all technical indicators, Keltner Channels have some disadvantages.
- Lagged Information:
The methods used in the calculation of Keltner Channels are based on past price movements and do not provide an accurate forecast for the future. Keltner Channels may not react quickly enough to real-time price movements.
- Market Conditions:
Market conditions may also cause Keltner Channels to fail to produce meaningful results from time to time. For example, in extremely volatile environments, the price may temporarily break through the Keltner channels, either up or down, causing investors to make various misinterpretations. On the other hand, price movements that remain sideways for a very long time may not be meaningful because the price has not reached the peak and trough bands, which can be considered key points in the channel.
- Variable Inputs:
The ATR multiplier and EMA length used in the calculations of Keltner Channels are variable values. For example, the EMA length is usually used as 20 days, but traders can change the length according to their strategies. Values that do not match trading strategies may provide inaccurate information about trending strength and direction.
Who Developed The Keltner Channel?
The Keltner Channel Oscillator was first mentioned in 1960 in Chester W. Keltner’s “Ten Day Moving-Average Rule”. In its first published version, Keltner Channels used the High/Low points determined by the 10-day Simple Moving Averages (SMAs) to calculate the bands. However, Linda Bradford Raschke, a prominent figure for her work on the Keltner Channels, published a new version in 1980, which allowed volatility to be used as the basis, just like the Bollinger Bands. The Average True Range, a volatility-based indicator, is used today to determine the width of Keltner Channels.
When To Use The Keltner Channel In Trading?
The Keltner Channels Oscillator is suitable for all traders who want to make inferences about the market trendline through volatility. Keltner Channels, based on both bands and breakdowns, are very popular as they can both generate signals on their own and can be used to confirm signals generated by other indicators.
What Is The Best Keltner Channel Strategy?
Since indicators vary according to traders’ trading strategies, determining the best strategy will be unique to the trader. At this stage, traders need to decide whether their strategy is short-term or long-term and consider which of the many inferences can be made about trend reversals, trend strength, etc. they are interested in.
How Can The Keltner Oscillator Be Used With Other Indicators?
The Keltner Channels Oscillator can be used in combination with all other indicators. Confirmations on the oscillator, also referred to as key points, such as band breaks, trend reversals, strong trend movements, etc., are needed for traders to draw inferences. Traders and investors are expected to make use of other indicators such as RSI and MACD to obtain confirmations of realized price movements.
What Is The Best Setting For the Keltner Channel?
Since the variables to be used in the calculations of Keltner Channels vary according to traders’ strategies, there is no one best setting. Although the 20-day EMA is generally used in the calculations, traders who want shorter-term results can choose shorter-day intervals, while traders looking for longer-term results can choose longer-day intervals. The most important thing to determine when choosing the number of days is to find the optimal range. Using Keltner Channels on very short timeframes may cause traders to get false signals on possible volatility movements, while using very long timeframes may cause price movements to be reflected too late in the indicator and produce overly delayed signals.
Is The Keltner Channel Accurate and Reliable?
No single indicator can be reliable and accurate on its own. Since the variables used in the calculations of Keltner Channels are based on historical data, sudden changes in market movements may be reflected in delays on the oscillator. As with other indicators, macroeconomic developments and other technical indicators should be monitored to ensure that Keltner Channels are accurate and reliable.
FAQ
How can I add the Keltner Channel Oscillator to the charts?
The Keltner Channel Oscillator is available in the indicators section of many trading platforms. If Keltner Channels is selected as an indicator to be displayed, it will automatically appear on the chart.
How can I know if the Keltner Channels are signaling correctly?
In case of doubt about the accuracy of the analysis results obtained through Keltner Channels, you can check whether the available data coincides across all instruments with the support of other technical indicators.
Can the Keltner Channel Oscillator be used on any timeframe?
Yes, the Keltner Channel can be used on all timeframes, depending on traders’ strategies.
Can the Keltner Channel Oscillator be applied to all financial instruments?
Yes, the Keltner Channel Oscillator can be used for all financial instruments.
How often should I adjust the settings of the Keltner Channel?
Traders and investors can adjust the settings periodically based on the asset’s volatility.
Disclaimer
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