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Keltner Channels

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.

Keltner Channels consist of a middle moving average and two channel lines. The middle line of the Keltner Channels indicator is an n-period simple moving average of typical price. The channel lines are created by adding (for the upper channel line) and subtracting (for the lower channel line) an n-period simple moving average of the High/Low range.

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Interpretation

Keltner’s trading strategy regards price breaking above the upper channel line as a strong bullish (buy) signal. Conversely, price breaking below the lower channel line is considered a strong bearish (sell) signal.

It’s also mentioned that sometimes other confirming indicators such as the RSI or MACD should be used along with Keltner’s own “Minor Trend Rule”.

The “Minor Trend Rule” is a method for using the daily trend as a trading guide. Comparing today’s prices with yesterday’s prices, Keltner defines a downtrend by an absence of new highs and an uptrend by the failure of price to make new lows. Essentially, the “Minor Trend Rule” is a simple breakout method that buys on new highs (today’s high > yesterday’s high) and sells on new lows (today’s low is < yesterday’s low).

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