GlossaryKeltner 20 · 2 ATR

Keltner 20 · 2 ATR

The Keltner Channel places two bands around an exponential moving average of the close, at a multiple of the Average True Range. Because the ATR measures the actual range of the candles, the channel runs more smoothly than Bollinger Bands. Breakouts from it show unusually strong moves.

Calculation

$C_t$ is the close, $n$ the EMA length, $m$ the ATR length, $k$ the ATR factor.

Middle line (dashed), an EMA of the close. The starting value is the simple mean of the first $n$ closes, then:

\mathrm{EMA}_t = \alpha\,C_t + (1-\alpha)\,\mathrm{EMA}_{t-1}, \qquad \alpha = \frac{2}{n+1}

ATR with Wilder smoothing over the True Range; the starting value is the mean of the first $m$ True Ranges:

\mathrm{TR}_t = \max\left(H_t - L_t,\ \lvert H_t - C_{t-1} \rvert,\ \lvert L_t - C_{t-1} \rvert\right), \qquad \mathrm{ATR}_t = \frac{(m-1)\,\mathrm{ATR}_{t-1} + \mathrm{TR}_t}{m}

$H_t$ and $L_t$ are the candle's high and low.

Bands:

\mathrm{OB}_t = \mathrm{EMA}_t + k \cdot \mathrm{ATR}_t, \qquad \mathrm{UB}_t = \mathrm{EMA}_t - k \cdot \mathrm{ATR}_t

The area between the bands is lightly tinted. The channel begins as soon as both the EMA and the ATR exist, from candle 20 with the default settings.

How to read it

Breakout: A close above the upper band is an unusually strong upward move, measured against the usual candle range. Trend followers read it as an entry in the direction of the breakout, and the mirror image applies below the lower band.
Trend direction: If the channel points up and the price stays in its upper half, the trend is up. The middle line then often acts as support on pullbacks.
Sideways market: If the channel runs flat, the price often swings between the bands, and touches of the edges often lead back to the middle.

Tip Together with the Bollinger Bands, this gives the well-known squeeze reading: if the Bollinger Bands lie completely inside the Keltner Channel, the fluctuation of the closes is unusually small relative to the candle range. A larger move often follows such phases.

Settings

Setting	Default	Effect
EMA length	20	Length $n$ of the middle line (2–200).
ATR length	10	Length $m$ of the ATR for the band width (1–100).
ATR factor	2	Multiple $k$ of the ATR as the distance of the bands (0.5–10, in steps of 0.5).

Limitations

The ATR reacts with a lag. After a sudden burst of volatility, the channel only widens over several candles.
The bands are symmetric around the middle line. The channel doesn't tell you whether a breakout will hold.
The name in the menu gives the default values. The calculation uses your settings.