Keltner channels in gold trading

Keltner channels are volatility envelopes around a moving average. The common modern version uses a 20-period exponential moving average as the middle line, with upper and lower bands at the EMA plus and minus 2 × ATR (often ATR 10 or 20). The original version by Chester Keltner used a simple average of typical price and the average daily range.

How it applies to gold trading

Because the bands use ATR, they widen when gold is volatile and narrow when it is quiet, but more smoothly than Bollinger Bands, which use standard deviation. Trend traders treat a close outside the upper band as a sign of strong momentum and buy pullbacks to the middle EMA. Mean-reversion traders fade touches of the outer bands when gold is ranging.

Combined with Bollinger Bands, Keltner channels form the “squeeze”: when Bollinger Bands contract inside the Keltner channels, volatility is unusually low and a breakout often follows.

Worked example

Example (hypothetical numbers): on the 1-hour chart the 20 EMA is 4,010 and ATR(10) is $6, so the bands are 3,998 and 4,022. Gold closes at 4,025, outside the upper band. A trend trader waits for a pullback toward 4,012 to buy, with a stop below the lower half of the channel at 4,002.

A common mistake

Fading every touch of the outer band in a trending market. In strong gold trends, price can ride the upper band for many bars.

See also: Bollinger Bands, ATR, Volatility squeeze, Donchian channels.

Frequently asked questions