Keltner Channel is the indicator of technical analysis, which is similar to Bollinger's. The indicator is based upon moving averages in the form of median moving value and an envelope, width of which is defined by change of price for an interval. This method was published in 1960 year in the book “How to make money in commodities” written by Chester W. Keltner. Later Keltner Channel was updated by Linda Raschke with various averaging periods (exponential moving value) as well as by an Average True Range invented by Wilder for bands. Keltner Channel are used as signals of price breaks, figures of tendency, overbought and oversold figures for an asset. Such difference is crucial but despite that fact all those figures are called Keltner Channel thereby confusing everybody.
There are a lot of options to measure Keltner Channel, but the most widely-used is below:
Moving average (10- or 20-days') of Typical Price is equal to (High+Low+Close)/3 and is used for building a median line. In this case an average time range will be calculated as time period for a median line (10- or 20-days') multiplied into multiple. Obtained amount must be added to a median line for defining upper band of Keltner Channel.
Purchase – price crosses upper channel line or approaches it
Sale - price crosses bottom channel line or approaches it
Chester Keltner considered that if prices leaves channel range, it says about a new strong movement.
Sometimes interpretation of signals is made in the opposite way, thereby showing overbought/oversold status.
If current prices leaves channel range and is based below bottom moving value, we should wait until price returns into the channel. It helps avoiding a signal of false breaking of support level.
If price leaves upper band of channel, the best option is to wait it returns back to the channel. This way a trader can avoid big losses because of false breaking of resistance level.
The indicators operates the best when combined with additional indicator (for example, moving average), the goal is to avoid unnecessary transactions within trading range.