Calculation formula:
For the top band, calculate the average true amplitude on the basis of 10 unit period, multiply it twice, and then add the linear plus moving average of 20 unit period to get the new top band value. For the bottom band, calculate the average true amplitude based on 10 unit period, multiply it by 2 times, and subtract this value from the linear weighted moving average of 20 unit period to get a new bottom band value.
Overview:
Keltner channel: Keltner channel is an indicator based on the principle of average true amplitude, which is very sensitive to price fluctuation. It can replace the bollinger band or percentage envelope as a new tool for market judgment. Kentner channel consists of two endless belts, which fluctuate around the linear weighted moving average. Usually the parameter of linear weighted moving average is 20.
When the price breaks through the upper and lower rails of the belt, it usually produces a trading signal of long or short. Chester Keltner, the inventor of this index, was later optimized and improved by Linda Laschke. She used a linear weighted moving average of 10 units to calculate the average true amplitude (ATR).
Reference application:
Similar to all envelope or band systems, prices tend to move in the band. When the price breaks through the band, it usually means that there will be opportunities to go long or short.
When the price closes above the top belt, it usually means a breakthrough in upward kinetic energy, and then the price will continue to rise. When the price closes below the bottom band, it is expected that the price will fall.
In the rising market, the midline or 20-unit linear weighted moving average can support the price. On the contrary, in a falling market, the mid-line will suppress the upward price.
Like all trend tracking systems, the Kentner channel performs well in the rising and falling trends, but it is inferior in the consolidation market for the simple reason that the trend tracking system will not be committed to guessing the bottom.
Kentner channel should be mixed with other indicators, such as RSI and MACD, to confirm the power of the market. It is very important to cooperate with the trend line and other indicators in the exit strategy. If we passively wait for the price to close below the bottom band, it means that the profits in many good trends will be eroded.
When the price closes above the top band, it may mean that the price is strong and the market outlook is bullish.
When the price closes below the bottom band, it may mean that the price is weak and the market outlook is bearish.
The signal from the Kentner channel will remain valid until the price closes outside the other side of the band. However, with other indicators, the reconciled and optimized Kentner channel trading method can give better opportunities.