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The Keltner Channel, KC, was developed by Chester W. Keltner and is a technical indicator that looks like the Simple Moving Average Envelopes or Bollinger Bands. It is constituted of two lines that adapt to changes in the security's volatility by using the ATR or average true range indicator.
There are several variations in calculating the Keltner Channel. In this version, the midline is constructed by taking the exponential moving average of a time series (You can use the close price or the pivot point, which is sum of the high, low and close prices divided by three). The upper line is computed by adding the previous exponential average to the product of the Average True Range (ATR) and a factor called bandwidth. The lower line is computed by subtracting the same exponential average to the product of the ATR and a factor.
As with other "Envelope" or channel indicators, such as Bollinger Bands, Keltner Channel indicator generates a buy signal when the price crosses above the upper band and a sell signal when the price crosses below the lower band. The Keltner Channel doesn't work well in sideways markets; it is mainly used in trend following systems to take advantage of volatility swings.
The function name is "KeltnerChannel". It allows you to enter the period that is used to calculate the upper and low lines. This period is used in the exponential moving average and in the average true range. The Keltner Channel indicator requires also the price/time series and the factor or bandwidth value. The last parameter is used to determine which band (middle, upper or lower) the function should return.
Example:
plot(KeltnerChannel(close, 20, 2, 0), "Keltner Channel Middle", colorBlack);
plot(KeltnerChannel(close, 20, 2, 1), "Keltner Channel Upper", colorGreen);
plot(KeltnerChannel(close, 20, 2, -1), "Keltner Channel Lower", colorRed);
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