✔️ Information reviewed and updated in December 2023 by Eduardo López
Indicators like Keltner Bands are an extra help for traders, each one has different functions, as well as its advantages and disadvantages. They are all a facilitator to confirm what you think will happen to prices or to refute your hypothesis.
It is true that most are similar to each other, however, there are two types of indicators: oscillators and trend indicators. The former are constantly oscillating and passing through one or many certain levels; the latter determine the trend of the moment and be able to have a greater probability of success.
Here we tell you more about Keltner Bands, an indicator quite similar to Bollinger Bands.
✨Definition of the Keltner Bands indicator
Keltner bands are a technical indicator that is formed by three moving averages that are adjusted in relation to the volatility of the financial asset. The objective of this indicator is to offer extra information on the prices to be able to make better investment decisions.
So it is important that, like any other technical analysis indicator, it must be learned to use correctly in a trading system so that it can become useful in strategies.
✨ How are Keltner Bands obtained?
Keltner bands are very easy to calculate, especially since most trading platforms allow you to chart without doing the math. But, in order to have a better idea of what this indicator does, it is advisable to know how to do them.
The median line of the Keltner bands is an “x” day moving average of the typical price. This price is calculated by adding the maximum with the minimum and the close, and finally dividing it by 3.
The upper line is calculated by adding to the central line the value of a simple moving average, which is over the range of the period. In other words, first the center line is calculated, then the range (maximum-minimum) is calculated. Once you have it, a simple moving average is calculated over the range of x periods and the value is added to the value of the center line.
Finally, the lower line is calculated in the same way as the upper one. The only difference is that instead of adding the value to the center line, it is subtracted. This gives us the result of the three lines that form the Keltner bands.
✨ What is your interpretation?
The Keltner Bands Indicator provides us with easy to interpret trading signals. Next, we will describe which are the main signals that every trader should know about this indicator.
- The bullish signal is given when the candles break above the upper line.
- The bearish signal occurs when the price breaks the lower line.
Trends usually start with strong movements from one direction to another. A move above the upper line of the channel shows a great strength of the uptrend, while a move below the lower line means that there is a lot of weakness in the market.