We believe it can help you become a profitable trader. First, you'll learn some background information about the Keltner Channel to make more informed trading decisions. Now let's learn how to trade with Keltner channels indicator and how it can help you trade in different market conditions.

Keltner Channel is a technical indicator that belongs in the envelope indicators family. An envelope indicator, when plotted on a price chart, will display an upper and lower band. This creates a dynamic channel that contains the price range inside the two bounds.

This often happens in the presence of a strong trend. The Keltner Channel is a volatility-based indicator that is comprised of a simple exponential moving average. Around it, we have a lower band and an upper band that is based on a setting that you use. Our preferred Keltner channel parameters use a period for the middle exponential MA with a multiplier of 2 for the extreme bands.

The Keltner Channel will assist you to objectively measure the market volatility, assess the current trend, spot potential breakout trades, trade pullbacks, and trend reversals.

You can also use scalping techniques with the Keltner Channel if you want to be in and out of a trade quickly. Basically, the channel created provides an envelope for the price that very similar to the Bollinger Bands indicator. The difference between the two is that Keltner Channels are based on ATR Average True Range while Bollinger Bands are based on a standard deviation. If you want to get more technical and understand the math behind this volatility indicator, see the formulas below:.

During the time periods when the price kind of hugs the upper envelope and the upper band also points upwards, this is a signal of a strong bullish trend. In other words, the price continuously crawls along with the upper band. Note 2: The same is true in reverse, in which case the volatility indicator signals a bearish trend.

When the Keltner bands are flat and move horizontally, this trade signals the presence of a ranging market. In this case, the price tends to bounce between the upper and lower envelope without showing any clear directional bias. Another practical trading application derived from the Keltner channel indicator is the ability to measure retracements. Keltner channel indicator is a good source of information when it comes to pinpointing the end of a pullback.

In the presence of a strong upward or downward trend, pullbacks tend to stall near the middle period EMA. Now, before we go any further, we recommend taking notes over the rules of this scalping strategy. The Forex market has a natural rhythm that goes from a trending market to consolidation and vice versa. However, you also have to deal with different types of volatility that changes constantly.

The Keltner Channel indicator is a really great tool, but it tends to perform better when used in combination with other technical indicators. When it comes to breakout trading , the Keltner Channel is a very powerful indicator. The Keltner Channel breakout system works best when volatility rises. However, the Keltner indicator measures not just the volatility, but it can also show anomalies in the price behavior. Since the Keltner channel indicator is lagging in nature, we can use a secondary tool like the ADX indicator to give us more confluence.

These two indicators can help us catch explosive breakouts. With the ADX we measure the strength of the breakout. Any reading below 20 signals is a period of consolidation. The ADX needs to continue to rise to suggest that the trend is strong. When the Keltner Channel is used in combination with the ADX indicator, you can trade breakouts with objectivity. It is said that the number one account killer in the market is a ranging market. Consolidations are very difficult to trade. However, you can take advantage of the difference in the way the Keltner channel system can be used in combination with other technical indicators.

The majority of the time the price will hug the middle band. This anomaly in price behavior requires us to use a secondary technical indicator to find profitable trades. For range trading, we like to use Keltner Channel bands in combination with a 2-period RSI indicator. We tweaked the RSI settings so we can better identify tops and bottoms within a trading range. Trading pullbacks successfully can only be done in the presence of a strong trend.

Using the Keltner channel indicator we can study how the price behaves around the upper and lower envelopes to gauge the strength of the trend. As you already learned when the price hugs one of the two bands and crawls along with the band, we have a case for a strong trending market. Notice that the price retrace to the area around the EMA. This is a good way to measure pullbacks in price.

For a better timing of our trades, we can use the Stochastic RSI indicator in combination with the Keltner indicator for more confluence.

The trade trigger is simply to follow with this Keltner Channel pullback strategy. When appears a red sell arrow, place a sell order at the open of the next bar. In the pictures Keltner Channel Reversal Trading in action. Dolly Graphics Stochastic with the trend. Keltner Channel Reversal Trading. DSS Blade. RSI colored with Gann hilo. txt Site map. Rules for Keltner Channel Reversal Trading Long Entry Price must touch or go below the lower Keltner Channel band. Short entry Price must touch or go above the upper Keltner Channel band.

Keltner Channel Reversal Trading, In the picture CHF currency pair. Comments: 0. Keltner channel reversal trading.

compressed file archive Dolly Graphics 14 Stochastic with the trend Keltner Channel Reversal Trading DSS Blade RSI colored with Gann hilo.

The Keltner Channel is a volatility based trading indicator that uses two bands and the average true range to set the channel distance below and above an exponential moving average, generally 20 period EMA. You use the Keltner Channel to determine when a market has stretched too far from the moving average — the average price of the market of N number of days. Using Keltner Channels as part of a trading strategy takes advantage of a volatility based trading indicator which allows us to trade markets that are showing good price movement.

Trading indicators are derivative of price meaning that the results that you see via a trading indicator will come via a calculation using the price you see on your chart. This is a long winded way of saying that all trading indicators , including the Keltner Channel, are going to lag actual price movement.

Keltner channels work by combining the average true range of an instrument and then plots the multiple of the ATR above and below the exponential moving average by using bands. The settings are based on several inputs that you can change depending on your charting platform:.

The band multiplier is a very important number as it will determine how tight the outer and lower bands are to price. If the bands are tight, you may get a lot of excursions to the bands and beyond. This may be suitable for those scalping or day trading with the Keltner channel but not suitable for those looking for longer term plays in their instrument.

It is the buying and selling by humans and computers although the trading programs are programmed by humans that will move price. As humans, we are susceptible to emotions and beliefs and emotions are even more vulnerable when money is on the line. Channel trading , and this includes Bollinger bands and moving average envelopes, are theoretically designed to surround the general price action of the charted instrument.

You can use channels to determine when a market is oversold or overbought when you consider the price relationship to each side of the trading channel. One way to envision this general movement is consider that the price is travelling without an extreme bullish or bearish bias.

While there may be an overall bias in one direction, there is nothing out of the ordinary with the movement of price. You will see price break either the upper or lower bands and that indicates that something has changed in the market. This is the time when you want to be on alert for potential trading opportunities as it is clear that volatility has increased.

There are other things to consider but we can use the Keltner channel bands that surround price and the channels moving average as an alert for possible opportunity. They are a measure of volatility in the case of the bands and consensus when referring to moving averages. Both price volatility when price is showing strong movement and when price is in balance are places for potential trading opportunities. The average true range calculation of the Keltner shows us when there is an expansion in the price range of price which indicates some type of stimulus is hitting the market to move price.

The Keltner channel is plotted with two outer bands and through the middle is a 20 period exponential moving average EMA. Using the moving average, the middle line, as an area of general agreement in price, we can see when price moves away from it that one side is favored over the other. The further price moves away, the more we expect a snap back in the price. The Bollinger band is calculated using a standard deviation while the Keltner uses ATR average true range.

The Keltner Channel uses an EMA as opposed to the Bollinger Band which uses a SMA. There is a slight difference between an exponential moving average and simple moving average in terms of sensitivity as the EMA will react quicker to any major move in price. When price moves out of congestion range as this example shows, the bands stretch far from price.

The Keltner Channel on the other hand is smoother which makes it easier to spot trends in the market. Some traders utilize the Bollinger bands and the Keltner channel together to show a Bollinger Band Squeeze.

When the Bollinger is inside the Keltner, the squeeze is on. This indicates a trading range is occurring. As a trade setup, the movement of the bands outside of the channel is the trigger. This would indicate that the price is potentially about to go on a run as price breaks from the trading range.

Whether you are going to use the Keltner channel or Bollinger Bands for this trading system, is not the point. You can use either because it is the concept we are looking at. The original Keltner used a 10 period for the moving average but it caused traders to be whipsawed around far too much. Over time, the popular setting became a 20 period EMA, a 20 period average true range and a 2. These settings were brought to use by Linda Bradford Raschke. You can of course test various settings but in the end, we are simply looking for price engaging with either of sides of the channel.

Trading pullbacks is best done in a market that has exhibited a strong push in a direction in a trending market. This is based on swing analysis where you want to see conviction in a market swing that indicates another move in the same direction. Using the Keltner channel, we can use price traveling outside the bands as an indication there was conviction in the swing. If we are trading in an downtrend, you want to see price travel to the bottom channel and plot outside of the channel.

Even a shadow plot is sufficient if you are a more aggressive trader. When price is at the channel, that is an alert to look for a pullback in the price to an area around the 20 period EMA. This chart shows a down trending market in play. Highlighted by the orange color, you can see that price has traveled outside of the channel.

This is the first sign that we may have a trade if the pullback fits other criteria. Not all excursions equaled a pullback into the zone around the moving average and as you can see that at times, price traveled along the channel. That issue will be covered in a later trading tips segment. We would like to see price p ulling back not only to the mid-line but also to a price structure or exhibiting a topping pattern.

This is called confluence and can actually increase the probability of your trade getting some traction. We need a trigger to get into the trade and there are many tools that you can use.

Momentum indicators are a popular method as well as the very basic trend line. This chart is a factor 4 less than the previous chart. By using a smaller time frame to get into the trade, you may be able to get a better position sizing as you position yourself higher in the curve to the downside in this example.

The black dotted lines on this chart are boxing off structures of possible resistance that coincide with the pullback to the mid-line. These potential zones of trading opportunity that includes the structure are from the trading chart and I encourage you not to use the trigger chart to find the structure.

Before continuing, the area marked three may have some questions. It is a sloppy complex pullback because the second leg did pierce the bottom of the first before reversing from what may be considered a double bottom.

Where this gets interesting is the second leg matches in distance the first leg of the move. This is called symmetry and many traders will utilize this as a stand alone trading system. Price also exhibits a topping pattern, a double top and you can see from this chart that a confluence of factors were in play when price broke solidly to the downside. I am using standard trend-lines to show the counter-trend move in price which brings us to our setup zone.

You may use a standard break of the trend-line for your trade entry. Some traders like to target opposing structures while others would like a more objective means to find profit targets. Fibonacci was my original method of trading when I first started and have since refined things since the early days. The fact that we are trading pullbacks makes it easy to find our targets with Fibonacci in a way that is completely objective. We are going to take the move into the extreme of our pullback and project forward in time to a potential price target.

Here are the numbers that I personally use and will use for this example. Note that is omitted but I use it for targeting after a range. You can see the total pips for each trade in green for a combined total of pips Forex example before spread costs.

These targets are shown on the trigger chart for detail. If you are trading pullbacks close to the moving average or at the opposing channel line, consider taking profits or partial profits at the lower or upper channel depending on your trade direction.

In the graphic above, shorting around the moving average and using the lower band to adjust your stop or scale out partial profits is a sound trading approach. You will be using the volatility of the market to determine your price points as opposed to a subjective measure of price movement. You still have to put in the work in determining the overall trend direction, when counter trend trading is appropriate, extent of excursion plus the very important account management and risk profiles.

There are also other trading opportunities that Keltner channel trading may provide and I will cover some of those in a later post. A lot of work goes into designing a full trading plan including back testing and forward testing. Contact our trading coaches and see how Netpicks can help you on the road to successful trading. Effective Keltner Channel Trading Strategy. July 22, Posted by: CoachShane Categories: Day Trading, Forex Trading, Trading Article No Comments. How Do Keltner Channels Work?

As an example of band distance:. How To Trade With Keltner Channels It is the buying and selling by humans and computers although the trading programs are programmed by humans that will move price.

Channels can show deviation from normal price behavior Channel trading , and this includes Bollinger bands and moving average envelopes, are theoretically designed to surround the general price action of the charted instrument. The bands do not act as a physical barrier to price just as moving averages do not magically support price.

Keltner Channel and Moving Average Using the moving average, the middle line, as an area of general agreement in price, we can see when price moves away from it that one side is favored over the other.

Keltner Channel VS Bollinger Bands The Bollinger band is calculated using a standard deviation while the Keltner uses ATR average true range. You can visually see how Bollinger bands reacts differently with sudden price shocks. Bollinger Band Squeeze Some traders utilize the Bollinger bands and the Keltner channel together to show a Bollinger Band Squeeze. Price Channel Trading Plan The original Keltner used a 10 period for the moving average but it caused traders to be whipsawed around far too much.

How To Use Keltner Channels to Trade Pullbacks Trading pullbacks is best done in a market that has exhibited a strong push in a direction in a trending market. An excursion outside of the channel indicates an extreme from what was a considered normal price action. Price moves to channel extreme Not all excursions equaled a pullback into the zone around the moving average and as you can see that at times, price traveled along the channel.

Valid and invalid price excursion to channel extreme We now have three definite pullbacks that met our criteria of: Excursion outside of Keltner Channel Pullback to area of 20 EMA. A price cross of the average does not invalidate the trade setup.

Obvious trending market as shown by the slope of the channel and moving average. Lang Strategy Trading System. compressed file archive by forexdemogod , Fri Aug 30, am in MT4 Indicators. Last post by Daniele Sat Jul 14, pm. Short term trend red line,.

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