Keltner channel

A volatility envelope with three lines. The centre line is a moving average of the close, conventionally an exponential moving average over a window of a few weeks of bars. The upper and lower bands sit the same distance above and below it, and that distance is the average true range multiplied by a chosen multiple. Because the average true range measures how far a market has been travelling per bar, the channel opens out when ranges expand and closes in when they contract, while the centre line carries the direction.

The version in general use is not the original. Chester Keltner's nineteen sixties construction used a simple average of the high, low and close as the centre line and the average of the daily range for the width. The form almost every platform ships today follows Linda Bradford Raschke's revision, which substituted an exponential moving average and the average true range. Both are called a Keltner channel, so the parameters displayed beside the name matter more than the name: two charts labelled identically can be drawing different lines.

The comparison that is always drawn is with Bollinger Bands, which look similar and are built differently. Bollinger Bands set their width from the standard deviation of closing prices, so the width responds to how dispersed the closes have been. A Keltner channel sets its width from the average true range, which is built from each bar's whole high to low span and includes any distance from the previous close, so it registers a gap that the standard deviation of closes can miss. The practical consequence is that the two disagree most in exactly the conditions traders most want to read, around a gap and at the start of an expansion, and chart readers disagree about which behaviour is the more useful. A Donchian channel is a third construction again, taking its lines from the highest high and lowest low rather than from any average.

The confusion worth naming is reading a touch of a band as a signal in itself. A band is a statement about recent range, so price reaching one says that the move is large relative to that range and nothing more, and in a sustained trend price can sit outside a band for many bars in a row. The convention that a channel identifies overextension holds only inside a range bound market, and it is a convention rather than a finding: it is not stable across instruments or across settings, and changing the window or the multiple changes how often it triggers.