Keltner Channel

Keltner channel example.

The Keltner channel ^[1] is a technical indicator consisting of two bands above and below the moving average price indicator, the width of which is defined as a fraction of the average price change for the period ^[2] . The author of this technique is Chester Keltner ( English Chester W. Keltner ; (1909-1998)), who published it in his book “How to Make Money on Commodities ” ( English How to Make Money in Commodities ) in 1960 ^[3] .

Content

1 Construction Method
- 1.1 Original technique
- 1.2 Modified methodology
2 Trading Strategies
- 2.1 Original technique
- 2.2 Modified filter technique
- 2.3 Rule of small trends Keltner
3 Communication with other indicators
4 notes
5 Literature

Construction Method

Original technique

According to the original method, the typical price is taken as the price indicator, which is calculated according to the following formula ^[2] :

${\text{Typical Price}}_{t}={\frac {high_{t}+low_{t}+close_{t}}{3}},$ ${\ displaystyle {\ text {Typical Price}} _ {t} = {\ frac {high_ {t} + low_ {t} + close_ {t}} {3}},}$

Where ${\text{Typical Price}}_{t}$ ${\ displaystyle {\ text {Typical Price}} _ {t}}$ - typical price $high_{t}$ ${\ displaystyle high_ {t}}$ - maximum price, $low_{t}$ ${\ displaystyle low_ {t}}$ - minimum price $close_{t}$ ${\ displaystyle close_ {t}}$ - closing price of the period in question $t$ ${\ displaystyle t}$ .

The midline of the indicator line is a simple moving average of the typical price.

The upper and lower lines of the indicator are separated from the middle line by an amount equal to the simple moving average of the daily trading range ( trading range - the difference between the maximum and minimum trading prices for the period):

${\text{Trading Range}}_{t}=high_{t}-low_{t}.$ ${\ displaystyle {\ text {Trading Range}} _ {t} = high_ {t} -low_ {t}.}$

In the original methodology, 10-period moving averages are used as smoothing lines for all indicators:

${\text{Up Line}}_{t}={\text{SMA}}_{10}({\text{Typical Price}}_{t})+{\text{SMA}}_{10}({\text{Trading Range}}_{t});$ ${\ displaystyle {\ text {Up Line}} _ {t} = {\ text {SMA}} _ {10} ({\ text {Typical Price}} _ {t}) + {\ text {SMA}} _ {10} ({\ text {Trading Range}} _ {t});}$

${\text{Down Line}}_{t}={\text{SMA}}_{10}({\text{Typical Price}}_{t})-{\text{SMA}}_{10}({\text{Trading Range}}_{t}).$ ${\ displaystyle {\ text {Down Line}} _ {t} = {\ text {SMA}} _ {10} ({\ text {Typical Price}} _ {t}) - {\ text {SMA}} _ {10} ({\ text {Trading Range}} _ {t}).}$

Modified Technique

The Keltner Channel has undergone extensive research and modifications, in particular Linda Bradford Raschke recommended using an exponential moving average as the smoothing line, and the average true range (ATR; English average true range ) as the bandwidth:

${\textit {TrueRange}}_{t}={\textit {max}}({\textit {high}}_{t}-{\textit {low}}_{t},{\textit {high}}_{t}-{\textit {close}}_{t-1},{\textit {close}}_{t-1}-{\textit {low}}_{t})={\textit {max}}({\textit {high}}_{t},{\textit {close}}_{t-1})-{\textit {min}}({\textit {low}}_{t},{\textit {close}}_{t-1}),$ ${\ displaystyle {\ textit {TrueRange}} _ {t} = {\ textit {max}} ({\ textit {high}} _ {t} - {\ textit {low}} _ {t}, {\ textit {high}} _ {t} - {\ textit {close}} _ {t-1}, {\ textit {close}} _ {t-1} - {\ textit {low}} _ {t}) = {\ textit {max}} ({\ textit {high}} _ {t}, {\ textit {close}} _ {t-1}) - {\ textit {min}} ({\ textit {low}} _ {t}, {\ textit {close}} _ {t-1}),}$

Where ${\textit {TrueRange}}_{t}$ ${\ displaystyle {\ textit {TrueRange}} _ {t}}$ - true interval of the current period, ${\textit {high}}_{t}$ ${\ displaystyle {\ textit {high}} _ {t}}$ - the maximum price of the current period, ${\textit {low}}_{t}$ ${\ displaystyle {\ textit {low}} _ {t}}$ - the minimum price of the current period, ${\textit {close}}_{t-1}$ ${\ displaystyle {\ textit {close}} _ {t-1}}$ - closing price of the previous period.

Robert Colby recommends taking the bar closure as a price and using the Keltner channel in the modification of Linda Bradford Raschke in conjunction with a long-term exponential moving average filter. Trading long positions according to the signals of the Keltner channel only if the price is above the long-term exponential moving average and only short if below ^[2] .

Trading Strategies

Original technique

In the original methodology, it is considered that the intersection by the price indicator (maximum price, or, in modifications, to choose: closing price or typical price) of the upper line is a signal to open a long position and lower (minimum price, or to choose: closing price or typical price ) - short ^[2] .

Modified Filter Technique

According to the modified method recommended by Robert Colby follows ^[2] :

Open a long position (buy) when the closing price of the current day is less than the difference of the 4-day closing price on the previous day and 77% of the average true interval of the previous day, and the closing price should be higher than its 274-day exponential moving average.
Close a long position (sell) when the closing price of the current day is greater than the sum of the 4-day closing price on the previous day and 77% of the average true interval of the previous day, and the closing price should be lower than its 274-day exponential moving average.

For short positions, the author recommends a mirror description.

The Keltner Rule of Small Trends

The simplest way to follow a trend is the rule of small Keltner trends ^[2] :

Buy if the maximum price of the current period rises above the maximum price of the previous period by a certain amount.
Sell if the minimum price of the current period falls below the minimum price of the previous period by the same amount.

Under ideal conditions, such a strategy shows good results, however, in real conditions it is fraught with losses, as it generates a lot of transactions, which can lead to significant total transaction costs.

Link to other indicators

The Keltner channel exploits the same idea as the "envelopes" of the moving average and the Bollinger line , but in each of these cases unique methods are used to determine the width of the bands and, in the general case, the strategies are not correlated.

Notes

↑ Also found: Keltner channels, Keltner strip, Keltner strip .
↑ ¹ ² ³ ⁴ ⁵ ⁶ Robert Colby. Encyclopedia of Technical Market Indicators = The Encyclopedia of Technical Market Indicators. - M .: “Alpina Publisher” , 2011. - 840 p. - ISBN 978-5-9614-1443-1 .
↑ Chester W. Keltner, How To Make Money in Commodities , Keltner Statistical Service; 3rd Printing edition (January 1, 1960), ASIN: B0007I9UEM.

Literature

Chester W. Keltner, How To Make Money in Commodities , Keltner Statistical Service; 3rd Printing edition (January 1, 1960), ASIN: B0007I9UEM.
Oliver Paesler: Technische Indikatoren: das ideale Instrument für jeden erfolgsorientierten Anleger; Methoden, Strategien, Umsetzung . FinanzBuch-Verlag; [Bonn]: Investor-Verlag, München 2007, ISBN 978-3-89879-248-6 .

[names-1] Also found: Keltner channels, Keltner strip, Keltner strip .

[colbi.2-2] ¹ ² ³ ⁴ ⁵ ⁶ Robert Colby. Encyclopedia of Technical Market Indicators = The Encyclopedia of Technical Market Indicators. - M .: “Alpina Publisher” , 2011. - 840 p. - ISBN 978-5-9614-1443-1 .

[Keltner-3] Chester W. Keltner, How To Make Money in Commodities , Keltner Statistical Service; 3rd Printing edition (January 1, 1960), ASIN: B0007I9UEM.

Keltner Channel

Content

Construction Method

Original technique

Modified Technique

Trading Strategies

Original technique

Modified Filter Technique

The Keltner Rule of Small Trends

Link to other indicators

Notes

Literature

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