Keltner Channel (KC)
Keltner Channel is an indicator that uses the "envelope theory" operating high and low ranges. Keltner Channel is based on volatility. The general category of envelopes includes all kinds of moving average bands and channels. A middle line and two outer lines are the parts of envelopes. The principle of the theory states that the price falls generally within the envelope.
The price crossing the boundaries of the envelope is a trading opportunity, but still it is considered as an anomaly. Speaking about Keltner Channels, the price moving over any outer bands is usually followed by an expected reaction towards the opposite one. Overbought is seen when the price comes closer to the upper band, whether oversold is shown by the price approaching to the lower band.
Three lines are included in the Keltner Channel. There are two bands and an Exponential Moving Average (EMA) - generally, 20-day EMA - these bands trace around that. The price floating towards either band, often turns to be a sell or buy signal.
KC Middle = MA(Price, n, Type),
KC Upper = KC Middle + MA(TR, n, Type) * Dev,
KC Lower = KC Middle - MA(TR, n, Type) * Dev,
Price – the price in the current period (Close, Open, etc),
TR - True Range
Dev - deviation factor