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Keltner Channels are volatility-based bands that are placed on either side of an asset’s price and can aid in determining the direction of a trend.
The Keltner channel uses the average-true range (ATR) or volatility, with breaks above or below the top and bottom barriers signaling a continuation.
- Keltner Channels are volatility-based bands that are placed on either side of an asset’s price and can aid in determining the direction of a trend.
- The exponential moving average (EMA) of a Keltner Channel is typically 20 periods, although this can be adjusted if desired.
- The upper and lower bands are typically set two times the average true range (ATR) above and below the EMA, although the multiplier can also be adjusted based on personal preference.
- Price reaching the upper Keltner Channel band is bullish, while reaching the lower band is bearish.
- The angle of the Keltner Channel also aids in identifying the trend direction. The price may also oscillate between the upper and lower Keltner Channel bands, which can be interpreted as resistance and support levels.
Image by Sabrina Jiang © Investopedia 2022
Understanding the Keltner Channel
The Keltner Channel was first introduced by Chester Keltner in the 1960s. The original formula used simple moving averages (SMA) and the high-low price range to calculate the bands. In the 1980s, a new formula was introduced that used average true range (ATR). The ATR method is commonly used today.
The Keltner Channel is a volatility-based technical indicator composed of three separate lines. The middle line is an exponential moving average (EMA) of the price. Additional lines are placed above and below the EMA. The upper band is typically set two times the ATR above the EMA, and the lower band is typically set two times the ATR below the EMA. The bands expand and contract as volatility (measured by ATR) expands and contracts.
Since most price action will be encompassed within the upper and lower bands (the channel), moves outside the channel can signal trend changes or an acceleration of the trend. The direction of the channel, such as up, down, or sideways, can also aid in identifying the trend direction of the asset.
Keltner Channel Methods
Keltner Channels have multiple uses and how they are used will largely depend on the settings a trader uses. A longer EMA will mean more lag in the indicator, so the channels won’t respond as quickly to price changes. A shorter EMA will mean the bands react quickly to price changes but will make it harder to identify the true trend direction.
A bigger multiplier of the ATR to create the bands will mean a larger channel. The price will hit the bands less often. A smaller multiplier means the bands will be closer together and the price will reach or exceed the bands more often.
Traders can set up their Keltner Channels any way they like, with the following potential uses in mind:
- The angle of the channel helps to identify trend direction. A rising channel means the price has been rising, while a falling or sideways channel indicates the price has been falling or moving sideways, respectively.
- A price move above the upper band shows price strength. This is another indication that an uptrend is in play, especially if the channel is angled upwards.
- A drop below the lower band shows price weakness. This is evidence of a downtrend, especially if the channel is angled downward.
- If the price is continually hitting the upper band, but not the lower, when the price does finally reach the lower band it could be a sign that the uptrend is losing momentum.
- If the price is constantly hitting the lower band, but not the upper, when the price does finally reach the upper band it could be a signal that the downtrend is near an end.
- The price may also oscillate between the upper and lower bands. In cases like these, traders may use the bands as support and resistance. They may look to buy when the price reaches the lower band and then starts to move higher again and may look to sell or short after the price starts to fall again after reaching the upper band.
- After a sideways period, if the price breaks above or below the channel and the channel starts to angle the same way, that may signal that a new trend is underway in that breakout direction.
Keltner Channel Calculation
for the asset, based on the last 20 periods or the number of periods desired. of the asset, based on the last 20 periods or the number of periods desired.
- Multiply the ATR by two (or the multiplier desired) and then add that number to the EMA value to get the upper band value.
- Multiply the ATR by two (or desired multiplier) and then subtract that number from the EMA to get the lower band value.
- Repeat all steps after each period ends.
Keltner Channels vs. Bollinger Bands
These two indicators are quite similar. Keltner Channels use ATR to calculate the upper and lower bands while Bollinger Bands use standard deviation instead.
The interpretation of the indicators is similar, although since the calculations are different the two indicators may provide slightly different information or trade signals.
This indicator is most useful in strongly trending markets when the price is making higher highs and higher lows for an uptrend, or lower highs and lower lows for a downtrend.
Keltner Channel Limitations
The usefulness of the Keltner Channels largely depends on the settings used. Traders first need to decide how they want to use the indicator and then set it up to help accomplish that purpose. Some of the uses of Keltner Channels, addressed above, won’t work if the bands are too narrow or too far apart.
While Keltner Channels can help identify trend direction, and even provide some trade signals, they are best used in conjunction with price action analysis, fundamentals if trading for the long term, and other technical indicators.
The bands may also not act as support or resistance and they may seem to have little forecasting ability at all. This could be due to the settings chosen, but there is also no evidence that the price moving two ATRs or hitting one of the bands will result in a trading opportunity or something significant happening.
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Frequently Asked Questions
What is the Keltner Channel used for?
The Keltner Channel is used to identify trade opportunities in swing action as prices move within an upper and lower band.
Who was Chester Keltner?
The Keltner Channels were originally developed by market technician Chester Keltner in his 1960 book How to Make Money in Commodities. Keltner dies in 1998 at the age of 89.
What is the difference between the Keltner Channel and Bollinger bands?
Both technical indicators are similar; however, the Keltner channel utilizes average true range (ATR) while Bollinger bands use standard deviation.
Are Keltner Channels or Bollinger bands a better metric?
Both metrics are useful, but for producing different signals. Like Bollinger Bands®, Keltner Channel signals are produced when the price action breaks above or below the channel bands. Here, however, as the price action breaks above or below the top and bottom barriers, a continuation is favored over a retracement back to the median or opposite barrier.
What is a Keltner Channel strategy?
If the price action breaks above the band, the trader should consider initiating long positions while liquidating short positions. If the price action breaks below the band, the trader should consider initiating short positions while exiting long or buy positions.
Keltner Trading Strategy – Three Proven Ways for Success
Learn the three proven techniques you can use every day to trade with the Keltner trading strategy. The Keltner channel system can improve your profitability because it adapts to the ever-changing Forex market conditions.
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In this detailed step-by-step trading guide, you’ll learn about the Keltner channel indicator. 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.
This amazing indicator works best when used in conjunction with other technical indicators and/or chart analysis.
Now let’s learn how to trade with Keltner channels indicator and how it can help you trade in different market conditions.
How to Trade With Keltner Channels
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.
*Note: The price has the tendency to trade outside the Keltner channel boundaries. 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 20-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:
- Middle Band = 20-Period Exponential Moving Average Value
- Upper Envelope= 20-Period Exponential Moving Average Value + Multiplied Value of Average True Range (ATR)
- Lower Envelope = 20-Period Exponential Moving Average Value + Multiplied Value of Average True Range (ATR)
How to correctly interpret the Keltner volatility indicator.
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 20-period EMA.
Now, before we go any further, we recommend taking notes over the rules of this scalping strategy.
In this article, we’re going to look at the buy-side .
Keltner Channel System
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. That’s where the Keltner Channel system can help you be a more proficient trader.
The Keltner Channel indicator is a really great tool, but it tends to perform better when used in combination with other technical indicators.
Moving forward, we’re going to explore how you can combine the Keltner indicator with other tools and at the same time to suit the market environment you’re in.
We’re going to explore three typical examples where you can use the Keltner trading strategy.
Trading Breakouts with Keltner Channel
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. Generally, an ADX reading above the 20 level is considered to be the beginning of a bullish/bearish trend. 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.
Trigger conditions for buying breakouts:
- Keltner Channel bands need to turn flat.
- Price needs to break above the upper band.
- ADX needs to cross above the 20 level.
Follow the above trading rules if you want to avoid most of the false breakouts.
Trading Ranging Markets with Keltner Channel
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 price won’t really touch the bands when it bounces between the upper and lower envelopes. When we’re in a ranging market, you’ll often see that the price will fail to touch the bands. 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.
Since the Forex market spends most of its time in consolidation (around 70% of the time), it’s mandatory to have a range trading strategy to survive in this market.
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.
*Note #3: For this Keltner trading strategy we use the 90-10 levels of overbought and oversold readings.
Here are some rules that can guide you to make the best trading decisions:
- Keltner envelopes need to turn flat, to signal a consolidation.
- The price needs to break below the middle band.
- A buy order is triggered once the 2-period RSI goes below 10 indicating oversold conditions.
- The protective stop loss can be hidden on the other side of the Keltner band.
- For the long side take profit when the RSI reaches the 90 levels.
Trading Pullbacks with Keltner Channel
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.
In the chart below we’ve highlighted small retracements while the price hugs the upper Keltner band. Notice that the price retrace to the area around the 20-EMA. It won’t give you an exact price, but a price zone from where the price can potentially bounce and the bullish trend can resume.
This is a good way to measure pullbacks in price. Successful trading doesn’t require catching the exact turning point.
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. Pull the trigger when the price retraces to the middle band and the stochastic indicator develops a crossover from oversold territory.
Conclusion – Keltner Channel System
Knowing what type of market environment you’re in can help you decide what technical tools to use. Designing a trading strategy to suit all types of market environments requires a lot of work and backtesting. With all honesty, that’s very hard to accomplish and that’s the reason why we encourage you to learn how to trade with Keltner channels in combination with other tools.
Once you understand the power of Keltner channels and how to properly combine it with other technical indicators, a new realm of trading opportunities will emerge. This amazing indicator comes with most trading platforms, but even if you can’t find it in the indicator library, you can still opt to use a third-party developed Keltner channel indicator.
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Показателят за двоични опции Keltner Channels (индикаторни Keltner Channels)
Binary Options Indicator Keltner Channels е изобретил и описани подробно от Chester Keltner, в чиято чест и е обявен за по-късно. Функционалната част на късно разширен значително Linda Raschke. Той разкри значителни допълнения.
Ето как да се създаде показател графика на живо
Както можете да видите от снимката по-горе, на, Keltner Channels Indicator Той има формата три криви. Нещо като коридора на цените. За тенденция индикатор.
Сигнали Indicator Keltner Channels :
— Ако цената пресича долната граница на индикатора, трябва да очакваме бърз отскок и да се обърнат в обратна посока. Това показва, влизане в препродажбена зона. В този случай, опцията следва да бъде отворена CALL .
— Ако цената пресече горната граница на показателя, също се очаква да се възстанови и да се обърнат в обратна посока. Това показва, влизане в прекупна зона. Опцията трябва да се отвори за есен PUT .
Стратегията се основава на факта, че цената винаги ще се опитва да се върне в рамките на канала. Това се потвърждава от моите лични наблюдения.
Индикаторът показва добри резултати, можете спокойно да го използват в техния технически анализ, За да се избегнат фалшивите аларми, че е възможно да се съчетаят Keltner Channels Indicator дори и с някои инструменти, за да се определи силата на една тенденция.
Външно този показател за технически анализ е много подобен на лентите на Болинджър. Той също така се състои от три УО, които променят посоката си в зависимост от промените в цените. Тя е и универсална. С него можете да определите тенденцията, както и търговията в хоризонталната равнина.
За времетраенето на 20-30% от времето си, цената остава в канала, проследен от редовете на индикатора на каналите Keltner. А останалото тя прекарва върху нея, за да пробие канала и да потърси друга посока (тренд).
Но нямаше недостатъци. Когато се търгува по време на апартамент, има много фалшиви сривове на горната и долната граница. За филтриране на фалшиви сигнали се препоръчва използването на допълнителни осцилатори MACD, RSI, Stochastic, ADX и други.
Препоръчвам да се изследват поне основните модели на обръщане на свещи. Те ще бъдат идеалното допълнение към получаването на точни сигнали за открити сделки.
В търговията на тенденцията, аз препоръчвам отваряне сделки само в неговата посока. Това е, ако например имаме низходящ тренд, тогава е по-добре да изчакаме тези моменти, когато цената достигне горната граница на канала и се отклонява в посока надолу.
Що се отнася до избора на търговски активи за работа, съветвам ви да използвате тези валутни двойки, които имат средна или ниска волатилност. С висока активност се увеличава рискът от извършване на хаотични скокове, което ще доведе до появата на фалшиви аварии на границите на канала на Келтнер.
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