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The Keltner channel is a technical analysis tool used to determine price volatility and market trends. It consists of three lines, with the middle line showing a moving average of the stock price. The upper and lower bands are created by adding or subtracting a number, commonly a multiple of 1.5, to the stock price. The Keltner channel can be used to predict market trends and identify overbought or oversold stocks, but should be used in combination with other analysis techniques.
The Keltner channel is a chart that shows technical analysis of stock prices to determine price volatility and market trends. The painting consists of three lines or bands. The middle line illustrates a moving average of the share price. A number is used to add or subtract stock prices to create the upper and lower bands.
The middle band is usually a 10 or 20 day moving average of the stock price. The trader creating the chart determines the number used in the calculations that plot the upper and lower bands of the Keltner channel. A multiple of 1.5 is commonly used. This number is called the average true range multiplier. The multiplier creates the Keltner channel configuration.
Chester W. Keltner publicized this technical analysis in his 1960 book How to Make Money Trading Commodities. He called it the ten-day moving average trading rule. Although it is not clear if Keltner created this analysis, it is now known as the Keltner Channel.
The investor tracks the stock price in relation to how it moves along these three bands to predict market trends. Very often, when the stock price moves above the upper band, it is a signal to buy. Conversely, when the stock price falls below the lower band, the chart indicates a sell signal.
Some investors take the opposite approach. They buy when the stock price falls below the lower band. When the stock price breaks above the upper band, these investors treat this as a signal to sell the stock.
Investors who buy or sell outside of the bands follow price trends. A trend occurs when a price continually moves in one direction. If a market is not trending, then investors can still use the Keltner channel for buying and selling signals.
In a non-trending market, the channel can help predict when a stock is overbought or oversold. Investors take advantage of these situations to make a profit. When a price breaks out below the lower band, it is oversold. Investors wait until the price closes back within the band to buy the stock. This wait helps ensure that the stock does not start a downtrend.
When a stock closes above the upper band in a non-trending market, this is an oversold indicator. To avoid large losses, the investor waits until the price is back within the band before selling the stock. Waiting for the price to move ensures that the high price is not the start of a true uptrend. This helps the investor to ensure that they do not sell too soon.
As with other market trend analysis, the Keltner channel is not foolproof. Smart investors use this as only one part of their analysis when deciding when to buy or sell a particular stock. In combination with other techniques, charting stock prices using this technique can help an investor make informed decisions.
Smart Asset.
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