“Keltner Bands” were first revealed from the book,”How To Make Money in Commodities” by Chester Keltner. “Keltner Bands” look similar to “Bollinger bands” and are computed using a single moving average with a fixed width envelope using Average True Range (ATR). The center line is the 10-period average of “high,”low” and “close” prices. The outer bands are constructed using a 10-day ATR. For a “lower” band, a 10-period ATR is subtracted from the 10-period Pivot MA and for “upper” band, A 10-day ATR is added to the 10 period Pivot MA. Trading signals are generated when prices reach outside the bands as prices may be out of the normal trading ranges and potentially may retrace back to the normal prices.
Linda Bradford Raschke, later developed various theories and added modifications for Keltner Bands using different exponential moving averages and Average True Ranges.
“Keltner Channel” trading is a trend based system method and only suitable for trending markets and fail in congestion or side-ways markets. “Keltner Bands” can be effectively used along with other indicators and patterns.
Another way to use “Keltner Bands” is to trade in the direction of the trend. When prices close above the upper band, it may signal strength and prices may continue to rise. Similarly, when prices close below the lower band, it may signal weakness and prices may continue to fall. When prices retrace back into the bands, the prior trend may signal a reversal.
Overall, “Keltner Bands” are like “moving average envelopes” or “Bollinger bands.” The trading principles are similar except they are computed differently.
Trading Keltner Bands
Trading Keltner Bands
The example above shows “Keltner Bands” trading system from the Russell 2000 Emini chart. The middle band is represented by A 10 period Moving Average of Keltner average price (H+L+C)M. The upper band is computed by adding 10-period average of ATR to the middle band. The lower band is computed by subtracting a 10-period average of ATR from the middle band. “Keltner Bands” Trading System includes buying when the markets penetrate the upper band and selling when the markets penetrate the lower band. A “stop” order is placed at the middle band to protect the trade. “Keltner Bands” are very effective in trending markets and should be avoided in side-ways or congestion zones.
Trading Keltner & Bollinger Squeeze
Trading Keltner Bands with Bollingter Bands Squeeze
The example above illustrates “Keltner Bands” and “Bollinger bands” trade setup from the Russell 2000 Emini chart. A 2 1 period Bollinger bands with a 2-Standard Deviation indicator and a 10 period Keltener channel with an average of a 10 period ATR is plotted. This trade setup shows volatility contraction within a trading channel as Bollinger bands squeeze inside the Keltner channel. On April 30, 2007, at about 1 :30 pm, Bollinger bands squeezed inside the Keltner Bands to suggest a contraction of volatility and potential expansion move. When Bollinger bands break out of the Keltner Bands to the downside, a “short” trade is entered at the 830 level. By the end of the day, Russell 2000 closed near 816; 14 points from the entry.