Keltner Channels are created by employing a moving average of each bar’s volatility  from high to low, and then multiplying that  moving average by a constant number to  adjust the band distances from he moving average line. The moving average period to compute the average range and the average line. I’ve seen a variety of moving averages used, any where between 5 and 20 periods. With the constant used, I’ve seen between 1.3 and 1.9. Interpretation seems to vary based on moving average used.

When the MA is around 10 and the constant is 1.5 – 1.9 then

– When close is above the upper channel it’s time to get out of longs (or go short)
– When close is below the lower channel it’s time to cover shorts (or go long)

When the MA is around 20 and the constant is 1.3 – 1.9 then

– When close is above the upper channel it’s time to go long
– When close is below the lower channel it’s time to go short

My favorite interpretation

Price has to have touched the moving average but the day range must not be more than 50% of the distance from the average to the band. Bands and Moving Average must be trending up. Enter with intraday reversal in the direction of the trend.

I’ll be covering more of this indicator and more at the 21st Annual AIQ Seminar in Las Vegas, October 9 – 10, 2010.  Visit here for more info  http://aiqsystems.com/vegas2010.htm