Trading Keltner channels, how to use?
Previously we have studied one very popular toolbox namely Bollinger band.
All many traders know, Bollinger Bands are the most popular example of indicators to measure price volatility
But there is one more indicator that functions the same but with a different approach that is the Keltner channels.
Bollinger Bands in addition to measuring volatility.
But also determines the direction of the trend and the saturation conditions of prices, as well as identifying opportunities for a breakout.
One another toolbox as an alternative volatility indicator besides Bollinger Bands is the Keltner Channel.
Many traders use this indicator for the stock and commodity markets.
If Bollinger Bands rely on standard deviations, the Keltner Channel takes the ATR calculation as a measure of price volatility.
In terms of appearance, the Keltner Channel tends to be closer than Bollinger Bands, making it easier for traders to take signals from closing prices outside the channel.
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How to use Trading Keltner channels
As a historical indicator Keltner channel was first introduced by Chester Keltner in 1960, then refined by Linda Bradford Raschke in 1980.
The latest model Linda Raschke, which until now has been widely used for various purposes.
The Keltner channels are actually a combination of two other indicators, Exponential moving average (EMA) and Average true range (ATR).
Trading Keltner channels also have three lines similar to Bollinger bands.
For the calculation of center lines using Exponential moving averages (EMA) and both outlines using Average True Range (ATR), in contrast to Bollinger bands that use standard deviations.
The Keltner channel line also expands and contracts like a Bollinger band.
But the expanding width is not as wide as the Bollinger band, because this indicator uses ATR, which is also one indicator as dynamic support and resistance.
The Keltner channel can function as an entry and exit signal in trading, and also an indicator to identify overbought and oversold levels relative to moving averages, especially if the trend is flat.
Apart from that, it could be a clue to the possibility of a new trend forming.
This channel is dynamic following the price movement, in contrast to ascending and descending channels that use straight lines.
Example Trading Keltner channels
Take a look at the image below
The picture above is a pair of USDCHF with a daily timeframe.
You can notice that the two lines outside the center line seem to be a belt that limits price movements.
When prices closest to the channel’s upper line then bounce back down.
And vice versa when prices closest to the bottom channel’s line then bounce to rise.
By reading this simple example, I am sure if you will definitely be able to understand how to determine entry and exit.
If you think it will be short when the price nearest the top channel and will be long when the price nearest the bottom channel, that is correct, you can adjust the stop loss outside the channel, this work in range market condition.
How to trade using Keltner channels
The Keltner channel has a similar appearance to the Bollinger band, usually.
It shows the movement of currency prices in the range of both the upper and lower channels.
The top of the channel usually functions as a dynamic resistance.
Instead, the bottom of the channel functions as a dynamic support.
Dynamic support resistance Keltner channels
The Keltner channel usually uses 2 x ATR 10 settings for the upper and lower lines, while the middle line uses EMA 20.
In an uptrend or downtrend, the centerline of the Keltner channel often functions as a pullback where prices often bounce at that level before continuing the major trend.
When the uptrend, the price action tends to be limited in the middle of the channel,.
So it can be said that the midline is also a support area when the uptrend, so that it can also be used as an entry point when the uptrend.
The centerline of the Keltner channel functions similarly to the Fibonacci retracement, which is the level becomes a pullback from price trends.
Conversely, when a downtrend, price movements often bounce on the middle line of the Keltner channel.
So when downtrend, the middle band functions as a resistance, so you can place your position at this level with a stop loss on the channel’s upper line.
At the time of downtrend, prices will often pull back on the middle channel.
By understanding this tendency you can make trading plans more easily.
But not always the price will be uptrend or downtrend, sometimes price movements within a certain range.
In this condition, the upper line of the channel and the bottom line of the channel serves as a dynamic support resistance.
While the tendency of prices to move in a range is rise to the upper line of this channel as resistance and will go down to the bottom line of the channel, it`s become support.
Keltner channel breakout system
A general breakout strategy is to buy when prices move up across the upper channel or sell when prices fall below the bottom channel.
The breakout from the Keltner Channel gives a strong signal as a sign the price will run to the next.
If the candlestick is able to cross the channel above the Keltner channel, usually the price will continue to rise.
The image below shows how prices breakout above the Keltner channel, then prices tend to move in an uptrend.
Conversely, a breakout of the downtrend is when the candlestick crosses the bottom line of the Keltner channel, usually, the price will continue to move down.
The image below shows a breakout when the price broke through the lower channel.
Note that the breakout of the Keltner channel signals the big movements that are likely to occur in the future.
Keltner Channel MT4
The Keltner channel is a popular indicator but is not available by default on MT4.
When you start learning about this Keltner channel you might be wondering, where do I find this indicator on the mt4 trading platform.
Because this is not available by default in MT4, you can download it for free on the MQL5 market here.
When you click download, a window will appear asking if you already use MT4 or don’t have MT4.
If you already have an MT4 platform then you click that option and it will be directed to the platform on the market page.
The indicator will be installed automatically on your platform.
But if you don’t have MT4 yet you will be directed to the MetaTrader4 website and must install the platform first.
Keltner channel pro
Keltner Channel Pro is a modified indicator of the Keltner Channel that appears more complete with signal entry.
So besides showing price volatility, this MT4 indicator can signal potential entry points of volatility and the direction of price trends.
Keltner Channel Pro has three dynamic lines on the top channel, middle channel and bottom channel.
The top channel is a broken line, then the middle band can change color, depending on the direction of the current price movement (blue for uptrend and pink if downtrend), then the bottom channel that appears as a white line at the bottom.
Keltner Channel Pro is also equipped with an asterisk which can be used as a potential entry signal.
The blue star chart appears when the middle band is blue and marks the beginning of the uptrend movement, so it can be interpreted as a buy signal.
On the other hand, red stars identify sell signals because they appear after the price transitions towards a downtrend.
How to use Keltner channel pro
Open Sell rules
- Channel price slope down.
- The middle band is pink.
- A red asterisk appears.
- Open sell orders should be carried out at the next candle after the red star appears.
Open Buy rules
- The price channel slope to up.
- The middle band is blue.
- A blue star has appeared.
- Buy orders should be placed at the next candle, after the appearance of a blue star.
This indicator also provides an automatic alarm system to help you recognize the signal more precisely.
This warning will appear when there is a signal crossing and works well in all timeframes.
Trading Keltner channels is a toolbox that will help you in analyzing price volatility using Average True Range.
In the range of market conditions, the top channel will become dynamic resistance and the bottom channel will be dynamic support.
This indicator is another alternative to measure price volatility besides Bollinger bands.
Many traders use Keltner channel day trading, and to use it must be disciplined.
The three main pillars of Linda Raschke are Performance, Longevity, and Consistency.
Studying the Keltner channel indicator will increase your knowledge and add toolboxes that you can use as trading tools.