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The Keltner Channel is a technical analysis indicator used to help traders identify potential price breakouts and trend reversals in financial markets. It was created in the 1960s by Chester W. Keltner and is frequently used in conjunction with other technical indicators including moving averages and the Relative Strength Index (RSI).
The Keltner Channel consists of three lines: a central moving average line, an upper channel line, and a lower channel line. The upper and lower channel lines are based on the EMA and the Average True Range (ATR) of the researched asset, whilst the center moving average line is commonly a 20-period exponential moving average (EMA). The lower channel line is typically set at two times the ATR below the central moving average line, while the upper channel line is typically set at two times the ATR above it.
Market overbought and oversold circumstances are detected using the Keltner Channel. An asset is said to be overbought when its price rises over the upper channel line and suggests that a price correction or reversal may be forthcoming. In contrast, when an asset's price drops below the lower channel line, it is said to be oversold and may be due for a price recovery or reversal.
