Keltner Channels: What They Really Measure

Keltner Channels are a volatility-based technical indicator that measures the price range around aMoving Average, offering insights into market volatility and potential price breakouts. The indicator consists of three lines: a central moving average (typically exponential) and two outer bands positionedabove and below this average.

The outer bands are derived by adding and subtracting a multiple of the Average True Range (ATR) from the central moving average. ATR itself quantifies volatility by measuring the average range of price movement over a given period. This construction means the bands expand during periods of high volatility andcontract during low volatility.

What sets Keltner Channels apart is their focus on volatility-driven band placement rather than a fixedpercentage deviation like Bollinger Bands. The indicator essentially measures thedynamic relationship between price and volatility, showing howprice behaves relative to its recent average volatility level.

When price moves outside the Keltner Channels, it often signals a significant shift in volatility or the beginning of a strong trend. The bands contain price action roughly 90% of the time under normal market conditions, making any breakout or rejection at theband edges an important volatility signal.

In essence, Keltner Channels do not predictprice direction but rather quantify the strength and persistence of price movements relative to historical volatility norms.