The Keltner Channel: A Market Momentum Indicator
Posted by Edward Dy on July 5th, 2008
Photo credit wordlive88
The Keltner Channel was developed by Chester W. Keltner for the purpose of determining market momentum. This type of technical indicator is considered an envelope indicator and is in many respects similar to the Bollinger Bands. A Keltner Channel has three measurement bands; where the one in the middle represents the ten-day high, low and closing prices moving average for a particular asset.
We arrive at the high and low bands by solving the ten-day moving average of the difference between the high and low closing prices. We then should add to subtract this value from the middle band.
Theoretically though, asset prices should found somewhere in between the high and low bands 96% of the time. The remainder, which is only about 5%, can serve as a strong indicator that prices are gaining momentum in either direction.
Interpretation of the Keltner Channel though can be pretty straightforward: buy when the price is greater than the high band and sell when the price falls beneath the low band.
If a trader follows this advice, he would be expecting the price trend to continue for some time in a particular direction. By following this advice, a trader would be counting on the trend in price continuing for some time in the given direction. However, another method of interpreting the Keltner Channel advises the very opposite: buy when the price falls out of the Channel, and sell when the price surges over the channel. This interpretation would be dependent on an asset’s high momentum, which means that the asset is either overbought or oversold. These are situations which would render the price at the mercy of rapid turnarounds.
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