Keltner Channels on a Live Gold Chart

What it shows

Three lines over the candles: the basis in the middle, the upper line and the lower line. With the defaults the lines sit 2 average true ranges either side of a 20-candle EMA.

How Pravex works it out

1. Basis: an EMA of the source over Length. Switch off Use an EMA for the middle and it becomes a simple average.
2. Range, which depends on the Width measure. Average True Range (the default) is the smoothed true range over the Range smoothing length. True Range is the raw true range of each candle with no averaging. Range is a smoothed average of high − low over the main Length.
3. A candle’s true range takes in any jump from the previous close, not just its own high to low, so the day-open gap after the 17:00 New York break shows up in it.
4. Upper = basis + width multiplier × range and lower = basis − width multiplier × range.

Settings

Setting	Default	What changing it does
Length	20	How many candles feed the basis. In Range style it also sets the smoothing of high − low.
Width multiplier	2	How many ranges the channel sits from the basis. Larger numbers make a wider channel that price touches less often.
Source	close	The price the middle EMA is built from. The width does not use it: ranges always come from the high, low and previous close.
Use an EMA for the middle	On	On uses an EMA for the basis, which leans on recent candles. Off uses a simple average.
Width measure	Average True Range	Picks the width measure: Average True Range, True Range or Range. True Range reacts to every single candle and makes a jumpy channel; Range ignores gaps between candles.
Range smoothing length	10	The smoothing length for the Average True Range style. The other two styles ignore it.

How traders read it

The channel is a ruler in units of recent candle size. Price closing above the upper line says the move is bigger than the usual candle range would explain for that distance from the basis. A close outside the channel reads as strength in the direction of the break, and a close back inside as a fade.

Because the width comes from ranges and not closes, the channel tends to be smoother than Bollinger Bands. It does not squeeze as sharply when closes bunch. With both on the chart, Bollinger bands pulling inside the Keltner lines mark a stretch of very low volatility.

When it misleads

A single huge candle, such as a news spike, stretches the range and keeps the channel wide for many candles afterwards, long after the market has calmed down. In a slow grind the channel stays narrow while price drifts far from the basis, so touches can happen over and over. The True Range style has no smoothing at all, so the channel jumps with every candle. As with any channel, the lines describe the past and promise nothing about the next candle.

Questions and answers

How are Keltner Channels calculated?

A moving average gives the middle line. The range measure, times the width multiplier, is added for the upper line and subtracted for the lower one.

What is the difference between the three width measures?

Average True Range smooths true range over the Range smoothing length. True Range uses each candle’s raw true range. Range smooths high − low over Length, so it ignores gaps from the previous close.

Keltner Channels or Bollinger Bands?

Keltner width comes from candle ranges, so it changes smoothly; Bollinger width comes from how spread the closes are, so it squeezes and bulges harder. So on gold the Keltner lines drift through slow hours, while the Bollinger bands widen quicker once closes start running one way.

Why is the Keltner channel still wide hours after a spike?

The spike’s true range sits in the 10-candle ATR and only fades out as newer candles replace it. Until then the channel stays wider than the quiet market needs.

Related: Bollinger Bands, Average True Range, Donchian Channels, Envelope, every indicator.