KELTNER BANDS

The Keltner Bands are a chart plugin indicator designed to show trends in a stock or security. There are various ways that the Keltner bands can be implemented. Keltner Channels are explained in the book The New Commodity Trading System and Methods by Perry Kaufman and were first introduced in the book How To Make Money in Commodities, by Chester W. Keltner.

The formula that ErlangerQuote uses for its Keltner bands, in MetaStock format language, are as follows:

          Mid Band: MOV( (H+L+C)/3, 10, Simple )
          Upper Keltner Band:  MOV((H+L+C)/3,10,S) + MOV((H-L),10,S)
          Lower Keltner Band:  MOV((H+L+C)/3,10,S) - MOV((H-L),10,S)

Assuming C is the close, and H and L are today's high and low. The formula first computes a mid band that is a 10 bar simple moving average of the sum of the high, low and close of the interval. Next an upper band is created as the sum of the value of the mid band plus a 10 bar simple moving average of the high minus the low for the interval. The lower band is the value of the mid band minus the 10 bar simple moving average of the high minus the low for the interval. This Keltner in this form is very much like the Bollinger Bands, which uses a standard deviation for the computing of the bands offset from the mid band. The way to trade with Keltner is when the close C of the bar is greater than the upper Keltner band we go long and if the close C is below the lower Keltner band we go short. Such a system is therefore either long or short.

You can find other interpretations for the Keltner Channels where the average true range is added to the center line to create the bands, and exponential moving averages instead of simple are used. In these cases the Keltner Bands can compare the prices of yesterday with those of today. 

See http://www.paritech.com/education/technical/custom/trading/keltner.asp for more details.