Scalping 0 4. As these channel extremes represent a multiplier of the average volatility of the currency pair, when the price goes above or below the Keltner channels, it signifies that the market is trading outside of the average or normal price range. Everything I tried had failed.
The Keltner channel indicator belongs to a family of technical analysis tools called envelop indicators. Envelop indicators like Keltner channel uses one lower band and one upper band to create a dynamic channel around the price range of a financial instrument. Regardless of whether the asset is trading upwards, downwards, or sideways, envelop indicators can help define upper resistance and lower support levels. Before we dive into explaining the inner workings of a Keltner channel trading system and discuss how to use Keltner channels, you should learn the basics of how to read any envelop based technical indicator first.
Unless you fully understand the variables behind a technical indicator, you will not be able to fully comprehend what types of market conditions the indicator can work best in or how to apply the indicator to fit your trading strategy.
Keltner channel was introduced to the trading arena by a technical analyst named Chester W. Keltner, who first described the indicator in his book How to Make Money in Commodities, which was published in He initially used day Keltner moving average bands to calculate the middle band of the Keltner channel instead of the modern variety that uses a period exponential moving average in the Keltner channel settings.
In fact, the modern variety of Keltner channel, found as a built-in technical indicator in popular charting software, is the brainchild of world-renowned commodities and futures trader , Linda Bradford Raschke, who is the Founder and President of money management firm LBRGroup, Inc. The Keltner channel calculation could be easily summarized with the following formula: You see, the current version of the Keltner channel is comprised by combining two separate technical indicators.
The first component of the Keltner channel is a period exponential moving average, which acts as the middle band. The second element of the Keltner channel is a multiplied value of the Average True Range ATR indicator , which is commonly set at a value of 2. This means that the upper and lower channels are always at a 2x ATR distance from the period Exponential Moving Average middle band. Since the Exponential Moving Average reacts faster to the changing directional movement of the price, the Keltner channel can provide an accurate overall direction of the trend by smoothing the price action.
As you can imagine, the more volatile a Forex pair is, the wider the upper and lower channels will appear from the middle band. However, depending on the charting software and availability of indicator settings, you can also change the ATR look back period in order to tweak the Keltner channel indicator further, since the price action and volatility of each Forex pair is unique.
Hence, you can make minor tweaks in its settings to fit a particular currency pair. However, most beginning and novice traders should stick to using the default Keltner channel settings until they have gained sufficient experience trading with Keltner channels.
Besides the Keltner channel, several other popular technical indicators fit the description of envelop based indicators. For example, the Bollinger Band indicator is another popular example in this family of trading indicators.
For instance, while both Bollinger Bands and Keltner channels draw channels around the price range, the main difference between these two indicators is how the upper and lower, as well as the middle channel values are calculated. As demonstrated in Figure 1, the Bollinger Band indicator uses a period simple moving average for the middle band and draws its channels or upper and lower bands at a distance of 2 standard deviations from the middle band.
On the other hand, the middle band of Keltner channel calculation is based on a period exponential moving average, where the upper and lower channels are drawn at an equal distance from an Average True Range value multiplier. Unlike the Average True Range used in the Keltner channel, the standard deviation value of the Bollinger Band does not represent an average, and it creates more sharp edges on the chart.
Hence, some Forex traders prefer the Keltner channel over the Bollinger Band, as it draws smoother channels that can sometimes offer higher quality signals.
When the upper and lower channels of the envelop family of indicators move in an upward direction where the price continuously trades near the upper channel, Forex traders interpret this signal as an upward trending market condition. By contrast, when the channels are moving in a downward direction and the price continuously trades near the lower channel, the market is considered to be a downward trending market condition.
However, when the Keltner channels remain flat, and the price starts bouncing between the upper and lower channels without showing any directional tendency, Forex traders consider such market condition as a consolidating or range bound market. Currency price movements can typically stall and even tend to range for a brief period of time during uptrends and downtrends. During minor pullbacks that resume the prevailing trend, envelop based technical indicators help Forex traders recognize entry opportunities to add new or additional positions in the direction of the underlying trend.
Many times, you can quickly identify if the market is in an uptrend or downtrend, or consolidating within a range just by taking a look at the Keltner channels. Then depending on the underlying conditions, you would incorporate a Keltner channel trading strategy best suited for the particular market situation.
As discussed earlier, the upper and lower Keltner channels are always plotted at an equal distance from the period Exponential Moving Average. As these channel extremes represent a multiplier of the average volatility of the currency pair, when the price goes above or below the Keltner channels, it signifies that the market is trading outside of the average or normal price range.
However, if the Keltner channels remain flat and the price trades within the upper and lower bands of the Keltner channels without penetrating above or below, it signifies that the market is range bound.
One of the best aspects of the Keltner channel is that it not only provides traders with an overall technical market outlook about the on-going trend, but it can also signal a potential trend reversal when the price reverses and crosses the opposite channel. Using a Keltner channel strategy, you can generate actionable entry and exit trade signals that can offer a solid reward to risk ratio. Many experienced FX traders prefer to combine multiple uncorrelated technical signals to confirm the trend before placing their live trade orders.
The Keltner Channel is a band-indicator that takes into account the volatility of the market. Developed by Chester W. Keltner, it consists of three bands similar to Bollinger bands:. It is similar to Bollinger bands in its general theme, except it calculates volatility in different algorithm. Bollinger Bands define the standard deviation as volatility while the Keltner Channel use the Average True Range to extract volatility.
Trading Methods The Keltner Bands can be traded in several, very different methods. The first one is the simple Trend-Following breakout method. It is the simplest of all yet suffers from many whipsaws and weak signals. Breakout Method The breakout method exploits the fact that upon breakout of a Keltner band lower or upper , price tend to continue in the breakout direction.
The lower and upper bands serve as Support and Resistance areas and their breakout is triggering stops that initiate a trend. Go Short when price closes below the lower band of the Keltner channel.