Keltner Channels are volatility-based envelopes set above and below an exponential moving average. The Keltner Channels use the Average True Range (ATR) to set the channel distance from the exponential moving average. It is very similar to Bollinger Bands that use a simple moving average and channel lines made with standard deviations.
The exponential moving average shows the direction/trend and the upper and lower Average True Range based channels are used to identify breakouts or changes in channel direction. The two channels can also be used to identify overbought and oversold levels when the trend is flat.
When compared to Bollinger Bands, the exponential moving average used in Keltner Channels provides for a more responsive trend signal and as the standard deviation used in Bollinger Bands is more sensitive to price changes than the Average True Range in Keltner Channels, the upper and lower channels in Keltner Channels are more smooth. This is considered an advantage by many traders as it provides a much more constant width of the channels.