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# TECHNICAL ANALYSIS

### Background

The Keltner channels were originally developed by Chester Keltner in his 1960 book How to Make Money in Commodities. The basics have been amended since and the accepted default method is currently that the bands are based on the average true range (ATR), but the ATR is calculated over 10 periods. This ATR value is then doubled and added to a 20 period exponential moving average for the plus band and subtracted from it for the minus band. (This multiple of 2x is the default but there are many practitioners who use variations of between 1.5 and 2.5).

Basically the smaller the multiple the more trading signals are provided. For a long-term trader this is something to avoid and so he/she would err towards 2.5. For the intraday trader though more trading signals, as long as they’re filtered, are good.

### Theory

The Keltner like other similar indicators like Envelops and Bollinger Bands are intended to contain the most likely price action. Therefore the recommended use of these channels is that when prices close above the upper band, a positive signal is given as it indicates a breakout of upward volatility. On the other hand a negative signal is given when prices close below the lower channel.

This is quite a simple method of creating buy and sell triggers but Keltner lines can provide more.

The two extreme parameters can also be useful as counter indicators when prices stall, on a closing basis, at the line.

Even the middle, moving average, line can be useful giving trading signals as will be seen from the following examples.

### In Practice with personal adjustments

Although the default uses exponential moving averages i have changed this back to a Simple Moving Average as I found this to produce more consistent results.

I have also altered the ATR moving average from 10 to 13. The reason here is that I am a firm believer in Fibonacci numbers and that gives an alternative in this situation of 8 or 13 and back testing has indicated that a consistent use of 13 provides the best results.

#### Figure 1 is a USDCAD 2 Hourly Chart

The first signal here is given at point A where over two sessions the market fails at the top of the Keltner line. Prices come off from that point, offering ample profit opportunities and although the bulk of the trading lacks strong direction, it is trading gradually lower.

Eventually at point B selling pressure accelerates and this is highlighted by the first close beneath the lower Keltner channel. Prices trend steadily lower with the absolute bottom marked by a sharp rejection of the lows.

The subsequent bounce takes prices back inside the lower Keltner band marked, for our trading purposes, by the session close in side at point C.

The market trades steadily higher from this point and the positive tone is confirmed/accelerated by the close above the top of the Keltner channel market by D.