Keltner Channel was named after its author Chester W. Keltner. It's a typical Envelope indicator (alike the MA Envelopes), but it is also based on market volatility (similar to Bollinger Bands). It consists of a midpoint and 2 envelopes - upper one and lower one. The middle value is usually EMA20.
The construction of Keltner Channel looks like follows:
KC midpoint = EMAx
KC upper channel = KC midpoint + (ATR * Dev)
KC lower channel = KC midpoint – (ATR * Dev)
EMAx = EMA for a chosen period of time (or another type of moving average)
ATR = Average True Range
Dev = Distance of the channels (e.g. 2-multiple). The higher the deviation is, the further the channels from the midpoint are
The chosed time period for moving average construction is also often used for the Average True Range calculation. But sometimes you can find some variations of EMA20 as the midpoint combined with 10-days ATR, too.
How to use the Keltner Channel:
When the price crosses the Upper channel upwards, the market is overbought. When it crosses the Lower channel, the market is oversold. If the price crosses one of the channels we can expect its reversal and a move back to the midpoint or the opposite channel, comming soon.
As every indicator used to point out the possible reverse points in advance, so the Keltner channel can produce some false signals. It is common especially when there is a strong trend present on the market. In such case Keltner channel signalizes oversold/overbought conditions, but the trend continues to rise or fall and there are no reversal points comming. That's the reason why you should pay attention to the fact whether the price broke through or just approached the channels. If the price just approached the channel and now it stagnates in one of the ranges, the new trend could begin. So beware of entering trades that aren't in line with the trend. You can find more on this topic in the MA Envelopes article.
If you are interested in a deeper study of this technical indicator and prefer ready to serve solutions, this section may be of interest to you. There you can find all the available indicators in Excel file for download.