Keltner Channels Tool – Channeling The Spirit Of Chester W. Keltner

Keltner Channels are a standard method of utilizing channel theory. Originally intended for the Chicago grain markets this type of channel has found widespread acceptance. Is it the right tool for binary options trading….read more and find out.

A friend, trader and colleague of mine has been trading with Keltner Channels for a long time. Since she was trading complicated butterfly and condor options positions I didn’t see any reason to investigate. Unusual I know because I am a trading and information geek, no pun intended.  Part of my job here at BOTS is to seek out, review and test tools and strategies so I figured now was a good time to check Keltner Channels out.

What is Keltner Channels?

Keltner Channels are actually not Keltner’s channels. He never laid claim to the technique, he was just the first to describe their use and put it on paper. Chester W. Keltner (1909-1998) was a Chicago grain trader who wrote the book “How To Make Money In Commodities”. Channels are a well known and ancient form of  technical analysis that go back to the earliest day’s of charting. Keltner, in his book laid out a standard set of channels and how to use them. The original channels were based on his 10-day moving average rule. A central 10 day moving average was flanked on each side by a ten day moving average of high prices. The theory, tool and strategy was soon referred to as Keltner’s Channels and then just Keltner Channels.

Keltner Channels Today

Today Keltner Channels are a little bit different but used in exactly the same way. Now they are based on a 10 day ATR and a 10 simple moving average of typical price, that being the average of the high, low and close. The channel is created by applying 2xATR to the signal line. This creates a volatility based indicator similar to Bollinger Bands. The difference being that Bollinger Bands use standard deviation instead ATR to determine channel width. The basic strategy is simple, the underlying asset is bullish when above the central line and bearish when below. This is of course relative to the underlying trend. Even Keltner himself did not think that his channels were an indicator strong enough to stand on its own and suggested the use of other indicators to help determine trading stance.

Why Keltner Channels Do Not Suck

Keltner Channels can give of a variety of signals but they should always be used in conjunction with other tools such as support/resistance, Fibonacci, trend lines, oscillators or “other”. The first type of signal is the trend confirming or trend following signal. This signal has a weak and a strong entry just like most other types of analysis. The first signal is when price action confirms the central line in the direction of the underlying trend. That is, price climbs above or falls below the central line and closes there. The second and stronger signal is when price climbs or falls below the channel line. If the trend is up and price climbs above the upper channel line it is signaling a buy. The reverse is true for a bear trend. This signal can also be used for range bound assets with the caveat that support or resistance will likely reverse asset prices. This signal can be taken when price is crossing the line in the direction of the trend.

The second type of signal is for contrarian or reversal trading. When prices are trending strongly and outside the channel you can expect them to return to the center line at some point in the future. This signal is a little more tricky to use but is reliable when mastered. The theory is that prices have reached an extreme when they are outside the channel, the longer that prices are at an extreme the more likely that they will correct back to the central line. This analysis is particularly useful when prices are also at a support, resistance, trendline, moving average or some other place of potential reversal. This signal takes a little more practice to use successfully because prices may be outside the channel for an extended period of time before reversing.

What Time Frames Needed For Keltner Channels

Keltner Channels have one of my favorite characteristics in a tool, it can be used in any time frame. Just keep in mind that the short the time frame the more unpredictable the market will be. Longer time frames like daily or weekly charts can be used with weekly or monthly expirations. The shorter time frames like hourly, 30 minute, 15 minute and 5 minute charts should use much shorter expirations. Hourly and 30 minute chart signals will most likely work well with 2 hours to end of the day expiry. The super short 15 and 5 minute charts should stick to hourly positions.

Why Keltner Channels Might Suck

This tool might suck if you do not use another tool along side it. I can’t stress enough that this tool needs confirmations from other indicators. You need to use a solid technique for determining support and resistance and have a good grasp on underlying trend. Momentum tools like RSI and MACD can help too.

My Last Words On Keltner Channels, They Do Not Suck!

I am so glad that I channeled the spirit of Chester Keltner. I really like this tool and have enjoyed testing it out. I think it is a good tool for any level and one that can be used with success. So far I have had good results using it with Fibonacci’s and trendlines. I had my 30 day EMA up with it at first but I thought the chart got cluttered with it. Whatever the case, be sure to add some additional indicators and analysis for best results. My friend uses nested Keltner Channels, she starts with the standard 2xATR and then adds a 3X and a 4X ATR as well. She finds that when one channel line confirms another strong signals follows.

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