Keltner Channels
Keltner Channels are a volatility-based technical indicator consisting of three lines: a central exponential moving average and two outer bands set at a multiple of the Average True Range (ATR) above and below the center line. Originally developed by Chester Keltner in the 1960s and later modified by Linda Bradford Raschke, they are used in technical analysis to represent historical price volatility envelopes.
Chester Keltner introduced an early version of this indicator in his 1960 book How to Make Money in Commodities, using a 10-day moving average of typical price as the center line with upper and lower bands set at a fixed distance. The modern version of Keltner Channels, which is now the standard formulation, was popularized by Linda Bradford Raschke in the 1980s and uses an exponential moving average (typically 20-period) as the center line, with bands calculated at a specified multiple of the Average True Range (commonly 1.5x or 2x ATR) above and below it.
The use of ATR to set the band width means Keltner Channels automatically widen during periods of high historical volatility and narrow during periods of low historical volatility, adapting to the security's recent price behavior. This distinguishes Keltner Channels from fixed-percentage envelope indicators and makes their width a reflection of the security's actual historical volatility over the ATR calculation period. Technical analysts have historically observed how prices have interacted with the channel boundaries across different market environments, noting patterns in the historical record regarding periods of persistent price behavior within or outside the bands.
Keltner Channels are often compared to Bollinger Bands, another volatility-based channel indicator developed by John Bollinger. The primary structural difference is that Bollinger Bands use standard deviation of price to set band width, while Keltner Channels use ATR. Because standard deviation is more sensitive to sharp price spikes, Bollinger Bands can occasionally expand dramatically in response to a single extreme price bar in a way that Keltner Channels, using the smoother ATR measure, do not.
As with all technical analysis tools, Keltner Channels reflect historical price and volatility data. Their visual representation of historical price envelopes is an educational and analytical tool, not a forecast of the range within which future prices will trade.
One widely discussed application of Keltner Channels in the technical analysis literature involves using their relationship with Bollinger Bands as a volatility squeeze indicator, a concept explored by John Carter in his work on trading techniques. When Bollinger Bands compress inside Keltner Channels — indicating that price-based volatility has contracted relative to range-based volatility — some analysts have historically noted that this condition in the data has often preceded a period of expanded price movement in one direction or another. As with all such historical observations, this relationship is descriptive of past price behavior and carries no guarantee of future outcomes.