Keltner Channels: an ATR envelope around an exponential average

What it measures

Keltner Channels place an envelope around an exponential moving average, with the width set by ATR rather than by standard deviation.

The distinction from Bollinger Bands matters: ATR measures typical bar range including gaps, while standard deviation measures dispersion of closes. They respond differently to the same market.

In practice Keltner Channels are the steadier of the two. A session that whipsaws violently but closes near where it opened barely moves a standard deviation and expands ATR considerably, so the Keltner envelope widens while the Bollinger one does not — which is the behaviour you want when the channels are being used to size a stop rather than to spot an extreme.

How it is calculated

These are the steps Basis performs, verified against the published definition.

1. 1

   Compute an exponential moving average of the close over the period. That is the basis.

2. 2

   Compute ATR over the same period.

3. 3

   Place the bands at basis ± multiplier × ATR.

Settings

Twenty periods with a multiplier of 2 is common; the squeeze convention uses 1.5. A lower multiplier makes the channels tighter and the squeeze condition rarer, which is usually the right direction to move if the setup is firing too often to be worth watching. Because the width is ATR-based, the same multiplier means the same number of typical bars on every instrument, so settings transfer between markets far better than Bollinger multipliers do.

How to read it

• Because ATR includes gaps and intrabar range, Keltner Channels widen on violent single bars that leave Bollinger Bands relatively unmoved.
• Price riding the upper channel is a trend reading; the channels are smoother than Bollinger Bands and produce fewer touches.
• The comparison between the two is itself a signal — Bollinger Bands contracting inside Keltner Channels is the squeeze setup.
• The exponential basis reacts faster than the simple average Bollinger Bands use, so the whole envelope tracks a trend more closely and gives back less at a turn.

Where it misleads

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