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Keltner Channels

In short

ATR-based price channels around an EMA — volatility envelope

Similar to Bollinger Bands but uses ATR instead of standard deviation. Three lines: middle EMA and upper/lower channels. Price outside the channels suggests a strong trend. Inside = normal trading range.

Keltner Channels use a 20-period EMA as the middle line, with upper/lower bands at 2×ATR above/below. Less sensitive to price spikes than Bollinger Bands. When Bollinger Bands squeeze inside Keltner Channels, a major breakout is imminent.

Formula

Upper = EMA(20) + 2×ATR(10); Lower = EMA(20) - 2×ATR(10)

Related concepts

  • Bollinger Bands — Three lines around a stock's price: a middle average and two outer bands. When the price touches the upper band, it might be overbought. Touch the lower band, possibly oversold. When the bands squeeze together, a big move is coming.
  • ATR (Average True Range) — ATR tells you how much a stock typically moves in a day. If a $100 stock has ATR of $3, it moves about 3% daily. High ATR means volatile; low ATR means calm. Useful for setting stop-loss distances.
  • Exponential Moving Average (EMA) — Like a regular moving average but it pays more attention to recent prices. If a stock just had a big move, the EMA reacts faster than the SMA. Traders use EMA crossovers to spot trend changes early.
  • ADX (Average Directional Index) — ADX tells you how strong a trend is on a scale of 0–100. Above 25 means there's a real trend happening. Below 20 means the market is choppy with no clear direction.