A derivative of the Keltner channel with a calculation using the ATR.
Overview
Originally developed by Chester W. Keltner and first introduced in his 1960 book “How to Make Money in Commodities”, Keltner Channels help identify market trends using a rather simple volatility channel. The original Keltner Channels formulas were later modified by Linda B. Raschke replacing a moving average component with the ATR.
Construction
Raschke replaced the original price-range simple moving average channels with bands based on an average true range (ATR) measure of volatility. Raschke’s modified Keltner Channels (Bands) are similar to Bollinger Bands except that Bollinger Bands use a standard deviation method to determine volatility.
The Keltner Bands indicator is an n-period exponential moving average of the closing price. The bands are created by adding (for the upper band) and subtracting (for the lower band) an (n-period simple moving average of an n-period ATR) * an ATR multiplier.
Ketlner Bands based on ATR plotted on a 4H gold chart 4/16/2011
Source: VT Trader
Interpretation
The modified Keltner ATR Bands can be traded in much the same methods as Bollinger Bands.
* When prices move outside the bands a continuation of the current trend is implied
* Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the trend
* A move that originates at one band tends to go all the way to the other band
