Ultimate Algorithmic Trading System

Keltner Channel
Chester Keltner brought this volatility-based indicator to public attention in 1960
through his book, How to Make Money in Commodities. The Keltner Channels are very
similar to Bollinger Bands except the centerline is a moving average of typical price
((H + L + C) / 3) and the outer bands are calculated using average true range
instead of standard deviation. Volatility can be measured in many different ways,
but standard deviation and average true range are probably the two most popular.
The two key components of this indicator that set it apart from Bollinger’s are
the use of the typical price (TP) and the average true range. TP is simply the average
of the high, low, and close prices. The TP takes into consideration the range of the
day as well as the close, and as stated earlier, many feel this price is more indicative
of the daily price action than simply the close. Since Bollinger and Keltner indicators
are so similar, you will notice that the calculations aren’t that different:
Calculation of Keltner Channels using 60 days and 2 ATR:
1. Calculate a 60-period SMA of the TP for the chosen time period.
2. Calculate the ATR of the 60-day sample (use a computer).
3. The top or upper band is the 60-period SMA + 2ATR.
4. The bottom or lower band is the 60-period SMA − 2ATR.
Box 2.9 shows a Keltner Channel trading algorithm that will be used throughout
the rest of this chapter.
Box 2.9 Using Chester Keltner’s Channels as a Trend Follower
Buy when market closes above top channel.
Sell short when market closes below bottom channel.
Sell when market position is long and market closes below average.
Cover when market position is short and market closes above average.
myTypicalPrice = (H + L + C);
myAvg = Average(myTypicalPrice,60) ‘ 60-day moving average of TP
myATR = AverageTrueRange(60)
myTopChannel = myAvg + 2 * myATR ‘ 2 ATR above average
myBotChannel = myAvg − 2 * myATR ‘− 2 ATR below average
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STOCHASTICS AND AVERAGES AND RSI! OH, MY!
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