What Is a Worked Example of Keltner Channels?

What are Keltner Channels, and what is a worked example?

Keltner Channels are a volatility-based indicator that plots a central line and two bands around it. The central line is a moving average of price. The upper and lower bands are the central line plus/minus a multiple of a volatility measure.

A worked example means you pick specific input values (prices and parameters) and calculate the bands step by step. Below is one such example with clearly stated assumptions. No live market data is used.

How does a worked example of Keltner Channels work?

Definition of the components (stable mechanics)

1. Central line (basis): a moving average of the closing price over N periods.
2. Volatility measure: an ATR-like quantity based on True Range. A common definition is:
   • True Range (TR) at period t = max(
     • high1 0 minus low1 0,
     • abs(high1 0 - prior close),
     • abs(low1 0 - prior close) ).
   • ATR over N periods is then an average of TR values (how it is averaged depends on the exact ATR method).
3. Bands:
   • Upper band = basis + (multiplier  ATR)
   • Lower band = basis - (multiplier  ATR)

Worked numerical example (all assumptions stated)

Assumptions for this example:

• We use N = 3 periods.
• We use a simple moving average (SMA) for the basis.
• We use a simple average of the last 3 TR values for ATR.
• We use multiplier = 2.
• We label three consecutive periods as t 0, t 1, t 2.

You are given the following OHLC data (example inputs):

• Prior close (before t 0): C-1 = 1.2000
• Period t 0: High = 1.2060, Low = 1.1990, Close = 1.2020
• Period t 1: High = 1.2080, Low = 1.2010, Close = 1.2040
• Period t 2: High = 1.2100, Low = 1.2030, Close = 1.2070

Step 1: Compute TR for each period.

• TR(t 0) = max( High-Low, abs(High- prior close), abs(Low- prior close) )

  • High-Low = 1.2060 - 1.1990 = 0.0070
  • abs(High - prior close) = abs(1.2060 - 1.2000) = 0.0060
  • abs(Low - prior close) = abs(1.1990 - 1.2000) = 0.0010
  • TR(t 0) = max(0.0070, 0.0060, 0.0010) = 0.0070

• TR(t 1): prior close = C(t 0) = 1.2020

  • High-Low = 1.2080 - 1.2010 = 0.0070
  • abs(High - prior close) = abs(1.2080 - 1.2020) = 0.0060
  • abs(Low - prior close) = abs(1.2010 - 1.2020) = 0.0010
  • TR(t 1) = 0.0070

• TR(t 2): prior close = C(t 1) = 1.2040

  • High-Low = 1.2100 - 1.2030 = 0.0070
  • abs(High - prior close) = abs(1.2100 - 1.2040) = 0.0060
  • abs(Low - prior close) = abs(1.2030 - 1.2040) = 0.0010
  • TR(t 2) = 0.0070

Step 2: Compute ATR as the average of TR over N = 3 periods.

• ATR = (0.0070 + 0.0070 + 0.0070) / 3 = 0.0070

Step 3: Compute the basis as SMA of the last 3 closes.

• Basis = (1.2020 + 1.2040 + 1.2070) / 3
• Basis = 1.6130 / 3 = 0.537666…

Because these numbers are in the form of price units, we keep the decimals exactly as arithmetic gives them:

• Basis = 1.204333… (correcting the total: 1.2020 + 1.2040 + 1.2070 = 3.6130; 3.6130 / 3 = 1.204333…)

Step 4: Compute upper and lower bands.

• Upper band = basis + (2  ATR) = 1.204333… + (2  0.0070)

• Upper band = 1.204333… + 0.0140 = 1.218333…

• Lower band = basis - (2  ATR) = 1.204333… - 0.0140 = 1.190333…

So, for the last period in this example, the Keltner Channels values are:

• Basis:  1.2043
• Upper band:  1.2183
• Lower band:  1.1903

What limitations and risks can affect Keltner Channels?