Why Is It Always Good To Use A Keltner Channel For Stock Research?

Let me start with a little background information for the keltner channel.

It is known that Chester W. Keltner first wrote about the channels in 1960, in his book How To Make Money In Commodities.

However, he never claimed credit for them.

Even though he wrote about it in 1960, he never claimed to be the inventor. And to this day we don't know where they came from.

So, without further adieu...

A Unique Technical Indicator

First glance at a keltner channel, and you may think...

Hey, this looks a bit like a Bollinger Bands.

Yes, they do look like Bollinger Bands. And they act pretty similar as well. However, the formula is a bit different.

Trading Strategies

The main way to trade the channels is to sell as the price goes above the top line and buy when the price goes below the bottom line.

This strategy is good most of the time. However, it works best in a non-trending stock.

So, before you jump in, you should make sure that the stock is not in a trending stage. You can do this with a moving average. If it hasn't had much volatility recently, it should be fine.

General rule of thumb...

When the stock price goes near the top band, it is considered overbought. And when it goes to the bottom band it is considered oversold.

This is why people react at those extremes.

This is the main strategy used with this oscillator. However, as with all oscillators, its always good to get a second opinion (from other oscillators).

The Math Behind The Channel

So, how exactly is the keltner channel made?

Let me start with the line in the middle.

The middle line is simple. It's the simple moving average of the typical price ( (high + low + close) /3).

Simple enough.

As far as the other two lines...

Well, they are calculated using a little thing called... The Average True Range.

You may not understand the average true range at first, as it is a little difficult. But I will briefly skim over it. And if you get it, great.

The average true range comes up with the following and then uses whichever one is the greatest:

• the current high minus the current low
• the absolute value of the current high minus the previous close
• the absolute value of the current low minus the previous close

From there, the average true range is multiplied by a decided number. That number is usually 1.5.

You take that number and add it to the center line to get the top band. For the bottom band, its the same. Except you just subtract it.

Give It A Chance

So, there you have it, the mathematical equation for the three bands. Not only that, you know how to use it profitably.

So, try it and if it turns out to be your favorite channel, awesome.