Keltner Channel, also known as Keltner Bands, is a volatility-based indicator that identifies trend, shows overbought and oversold readings and signals price breakouts. It is composed of a central moving average and two channel lines. It is named after Chester W. Keltner and is more popular to use during trending periods.
The two bands of the Keltner Channel are positioned above and below a 10-day simple moving average of the typical price (i.e. average of high, low and close). The midline is defined as the 10-day simple moving average of the range (i.e. difference of high and low).
In the 1980s, a newer version of Keltner Channels was introduced by Linda Raschke. The center line of the Keltner Channel is now based on the 20-day period Exponential Moving Average while a pair of bands is added and subtracted twice the Average True Range from the exponential moving average.
In a trending market, Keltner believed that a close above the upper line denotes a strong bullish sentiment and a close below the lower line signals a strong bearish sentiment. A stop loss order is set above (for short position) and below (for long position) the moving average. A long exit (i.e. sell the long position) is made when the price crosses below the moving average. A short exit (i.e. buy the short position) is made when the price crosses above the moving average.