Technical analysis is a method of studying assets traded on financial markets through the use of historical data, generally presented in the form of charts. Many investors, particularly active investors, primarily lean towards technical analysis to guide investments. That being said, whether you are an active or a passive investor, learning a few technical analysis strategies can be helpful in your assessment of markets.
Within technical analysis, there are numerous technical indicators that traders leverage to gain insights into the market conditions. Simply put, technical indicators are mathematical tools that analyze numerous data elements on a security’s price chart, and based on that analysis provide traders with easy to comprehend trading signals. The Keltner Channel is one such indicator that is widely used by technical traders to forecast the future price movement for an asset.
So, what exactly is the Keltner Channel Indicator in Technical Analysis? Keltner Channel Indicator is an envelope volatility indicator that comprises a moving average midline, and two outer bands that are equidistant from this middle line. The indicator is designed to show when prices are higher or lower than expected, when the dominant trend of the market is disrupted, and when assets are overbought or oversold.
In many trading scenarios, the Keltner Channel can function as a stand-alone tool for informing trade decisions, but experienced traders frequently use it in combination with other complementary indicators and analysis tools. In the following sections, alongside various strategies to trade using the Keltner Channel Indicator, we will discuss various calculations involved in this indicator’s construction, its structural components and interpretation, and various methods to improve its reliability. Therefore, if the idea of incorporating the Keltner Channel Indicator into your trading strategy has ever crossed your mind, I am confident that you will find value in reading this article further.
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Table of Contents
Brief History of Keltner Channel Indicator
The Keltner Channel was first introduced in 1960 by Chester Keltner, after whom it is named, in his book titled – “How to Make Money in Commodities”. In this early introduction, he calculated this indicator over ten days and therefore referred to it as the “Ten-Day Moving Average Trading Rule”. Later, the indicator was named after him and since then several indicator calculations have been revised. Linda Raschke is credited with making some of these changes in the late 20th century.
How to Read Keltner Channel Indicator?
Keltner Channels are relatively very simple and easy to understand indicators. In essence, Keltner Channels comprise three lines – the upper band, the lower band, and the middle line. The position of the price with respect to these lines at any point in time indicates the condition of the market.
That being said, to correctly read and understand various signals from the Keltner Channel Indicator, there are three topics that you must understand. These are –
- Construction of Keltner Channel Indicator
- Keltner Channel Indicator Calculations
- Interpreting Keltner Channel Indicator Signals
Now, without further ado, let us dive deep into all three of these topics.
Construction of Keltner Channel Indicator
Similar to other channel indicators, the Keltner Channel indicator is plotted on an asset’s price chart with time on the X-axis and price on the Y-axis. In essence, this indicator is designed to measure certain extremes above and below the moving average of the asset’s price.
By construction, the design of the Keltner Channel is quite simple. It consists of three components that are always the same regardless of the asset being traded. These three components are:
- The Middle Line: The middle line of the Keltner Channel represents and calculates the exponential moving average of the asset’s price. During its initial years, the indicator used a 10-period exponential moving average as its default setting to calculate this middle line. However, most traders have now moved to a 20-period moving average calculation for this line, since the 10-period calculation can get too heavily influenced by a few price outliers.
- The Upper Band: In essence, based on the current price trend, the Upper Band represents the expected price ceiling for the asset being analyzed. It runs a specific distance, which is twice the average true range, above the middle line.
- The Lower Band: The Lower Band of the Keltner Channel represents the expected price floor for the asset being analyzed. Similar to the Upper Band, it runs at a distance that is twice the average true range below the middle line. As a result of these calculations, The Lower and the Upper Bands of the Keltner Channel are always equidistant from the Middle Line.
Together these lines create a channel running from left to right on a price chart, with the most recent trading session marked by the candlestick on the rightmost side.
Keltner Channels, and other channel indicators, are also sometimes called envelopes because the outer bands are enveloping the inner line. While there are similar indicators, its specific calculations for the middle line and outer bands make the Keltner Channel unique and useful for individual traders in certain trading conditions.
Keltner Channel Indicator Calculations
To manually calculate the Keltner Channel, one must first find the exponential moving average of an asset over a selected duration of time for the middle line. Then, using the true range over a period, one may calculate for the outer bands.
Today, there are numerous trading software and charting platforms that can create Keltner Channels based on your preferred indicator settings. And frankly, due to the speed necessitated in trading to act on changes in price trends, it is most prudent to use such a program, and not calculate this indicator manually.
That being said, even though not required, knowing the calculations that go into creating the Keltner Channel will put you in a better position to understand the ideal market conditions for using this indicator and also its limitations. At the very least, knowing these calculations will help you understand the construction of the Keltner Channel Indicator better.
In a nutshell, there are three steps involved in calculating the Keltner Channel Indicator. These are –
- Step 1: Calculate Middle Line or Exponential Moving Average (EMA)
- Step 2: Calculate Average True Range (ATR)
- Step 3: Determine Average True Range (ATR) Multiple
- Step 4: Calculate Upper and Lower Band
Now, without further ado, let us briefly discuss all four of these above-stated steps that go into calculating the Keltner Channel Indicator.
Step 1: Middle Line Calculations
Moving averages, in general, are calculated using the daily closing prices over a given number of periods or trading sessions. The exponential moving average (EMA) is a weighted moving average, meaning more weight (or importance) is attributed to the more recent values collected.
To calculate the exponential moving average (EMA) for the price trend of a security, you will need the following:
- Previous Trading Session’s EMA
- Current Trading Session’s Closing Price
- Number of Periods or Trading Sessions: n
- Multiplier: k = 2 ÷ (n + 1)
Once you have the above-listed variables, you can calculate the EMA for your current trading session using the following formula –
EMA = [Current Session’s Closing Price * k] + [Last Session’s EMA * –k]
Step 2: Calculate Average True Range (ATR)
ATR is calculated by finding the mean of the true ranges over a specific period. That is, adding all of the true ranges together and dividing by the number of periods.
The true range of a day is the largest of the three numbers that you get by computing the three formulas listed below:
- Current Session’s High — Current Session’s Low
- Current Session’s High — Previous Session’s Close
- Current Session’s Low — Previous Session’s Close
Step 3: Average True Range (ATR) Multiple
The higher the multiple (x), the wider the channel will be. Wider channels give traders fewer but more reliable signals. Inversely, the smaller the multiple used to calculate the outer bands, the tighter the channel will be. The tighter the channel will be, the more will be the breakouts that occur.
As an individual investor, you must choose this multiple by balancing the frequency and the reliability of the trading signals that you want to get out of this indicator. If you are unsure what that ideal multiple would be, you can leave this multiple to the standard setting of 2.
Step 4: Calculate Upper and Lower Band
Once you have the EMA (or the middle line), the ATR, and the ATR multiple, the upper band is then found by adding the multiple (x) of the average true range (ATR) to the EMA, and the Lower Band is calculated by subtracting the same multiple of the ATR from the EMA. The multiple typically chosen is 2.
Keltner Channel Upper Band: EMA + x * ATR
Keltner Channel Lower Band: EMA – x * ATR
Interpreting Keltner Channel Indicator Signals
As with any technical indicator, the Keltner Channels show bullish trends when the EMA is positive, and bearish trends when it is negative.
Investors using Keltner Channels watch the actual price oscillating within or outside of the channel and use its position in relation to the channel to determine their next trading actions. At any point in time, there are four locations where the price could fall with respect to the Keltner Channel. These are –
- Above the Upper Band: If the price breaks above the upper band, it is an indication that an uptrend could be developing.
- Below the Lower Band: If the price falls below the lower band, it can be interpreted as a potential signal for an upcoming downtrend.
- Between the Middle Line and the Upper Band: If the price falls between the middle line and the upper band, it could mean that the price is range-bound. In such scenarios, you can anticipate a reversal or a breakout from the upper band.
- Between the Middle Line and the Lower Band: Similar to the above scenario, if the price falls between the middle line and the lower band, you can conclude that the price is range-bound. In this case, you would anticipate a bounce or breakout from the lower band.
In addition to what is described above, there are several other insights that you can extract using a Keltner Channel.
For example, when the price is steadily crawling along the upper or the lower band of the channel, it can be regarded as an indication of a strong trending market.
Furthermore, when the outer bands narrow down and come closer to the Middle Line, it signifies a slow market in which there is little change in the trend. In situations such as these, traders could reasonably predict fewer breakouts. This would, in turn, suggest fewer trading opportunities in the market.
Similarly, as the outer bands expand and widen away from the Middle Line, it is an indication of bigger changes in the price trend. This, in turn, suggests more trading opportunities.
Finally, when interpreting any of the above-stated trading signals, it is important to note that in comparison to several other envelope indicators such as the Bollinger Bands, the Keltner Channels are slower in responding to the market volatility. Therefore, on relative terms, in a high volatility environment, the indicator would not be quite as suitable for high-frequency trading but is likely to give less false signals.
Improving Reliability of Keltner Channel Indicator in Trading
Depending on your trading strategy, the trading signals generated by the Keltner Channels can be very reliable. One of the key advantages of incorporating Keltner Channels in your trading strategy is the fact that this indicator is pretty straightforward and simple to use. It does not overcomplicate the information that it provides and presents all insights in an easy to understand manner.
That being said, to a large extent, your ideal choice of technical indicator would depend on your trading personality and the information that you seek to ingest from these tools. It is not uncommon to hear investors complain about channel indicators providing too much or too little information for their individual needs.
When optimizing Keltner Channels for signal accuracy, indicator settings play a huge role. Based on how one configures the indicator, the accuracy of the expected price action signals can be increased.
Listed below are several indicator settings that you can manipulate to improve the reliability of Keltner Channels –
- Using a larger multiple of ATR can widen the outer bands of the indicator, thereby decreasing the frequency of breakout occurrences. This will result in fewer but more accurate trade signals.
- Using a longer period for calculating EMA will soften the indicator’s volatility, and make the trends easier to identify. Conversely, by using a shorter EMA (as Chester Keltner originally did), the indicator will move more in alignment with the price action, and thereby become more suitable for high-frequency short-term trading.
- Adding additional Outer Bands, by using different multiples of ATR, you can judge the severity of the breakout better. This technique is very effective in eliminating the possibility of entering a trade with a false breakout.
Additionally, while Keltner Channels can be quite effective as a standalone indicator, their accuracy can be considerably improved in combination with other complementary indicators. In fact, in his book, Technical Analysis of the Financial Markets, John J. Murphy suggests that Keltner Channels should never be used as stand-alone indicators.
Listed below are examples of several complementary tools and indicators in technical analysis that can be used to improve the reliability of Keltner Channels –
- Bollinger Bands
- Japanese Candlesticks
- Momentum Indicators
Now, let us briefly discuss how these indicators can be used to improve the accuracy of trading signals from Keltner Channels.
Bollinger Bands
Bollinger Bands and Keltner Channels are both Envelope Indicators that would look almost identical to the eyes of a novice trader. However, in reality, calculations that go into constructing both these indicators are very different, and therefore these indicators have their own set of strengths and weaknesses.
When looking at a Keltner Channel Indicator in comparison with a Bollinger Bands Indicator, it is easy to see that the Keltner Channel Indicator is less affected by volatility in the price. The Keltner Channel is smoother and looks more like a river, while the Bollinger Bands Indicator expands and contracts more wildly. This is because the Keltner Channels’ Outer Bands are calculated using ATR, as opposed to standard deviation in the Bollinger Bands, that the variability in price does not affect the width of the channels as much.
Keltner Channels’ lower sensitivity to variability in price ensures a higher accuracy of trading signals in high volatility market conditions, but it could occasionally result in an unsustainable reduction in trading signal count. Consequently, when using the Keltner Channels as a stand-alone indicator, you risk missing out on many profitable trade opportunities. This is where you can leverage Bollinger Bands to fill in this gap.
To further elaborate, in a high price volatility environment, you can use Bollinger Bands that have higher sensitivity to price variability to generate trading signals, and leverage Keltner Channels to gauge the accuracy of those generated signals.
Hence, the reliability of Keltner Channels to empower profitable trading decisions can be considerably enhanced when it is used in combination with Bollinger Bands.
Japanese Candlesticks
Depending on your trading strategy, Japanese Candlestick Patterns can significantly improve the reliability of trading signals generated by the Keltner Channels.
In essence, there are two ways in which these patterns can be used in combination with the Keltner Channels. These are –
- Confirming Reversal Zones: Japanese Candlestick Patterns can come in very handy, as a confirmation tool, when you are determining if the price of the asset being traded will reverse from an outer band (upper or lower) of the Keltner Channel. Particularly, you can view the appearance of various Reversal Candlestick Patterns at an outer band as an early sign of upcoming reversal.
- Confirming Channel Breakouts: When trading breakouts using the Keltner Channels, it is not uncommon for the price to briefly break an outer band (either upper or lower) and then reverse back. Hence, it is always a good idea to confirm that the price will continue its trajectory before entering breakout trades in such situations. This is where you can use various Continuation Candlestick Patterns as a confirmation tool.
Momentum Indicators and Divergence
Momentum Indicators are primarily used to determine the strength of a trend. Using these indicators to validate the trading signals from Keltner Channels, can significantly improve the accuracy of those signals. Hence, signals generated by Momentum Indicators are very complementary to those produced by the Keltner Channels.
If a newly formed trend is strong, its likelihood of breaking out of the channels is high. Contrarily, a weaker trend is more likely to reverse after reaching an outer band (either upper or lower).
One common, and powerful, method of employing Momentum Indicators to measure a price trend’s momentum is through Divergence. That being said, most momentum indicators will also provide a direct reading on the strength of a trend that you can consume directly.
Finally, when trading the Keltner Channels, there are a variety of Momentum Indicators that you can either use directly or to measure Divergence, for trade confirmation signals. The most popular and widely used among these are MACD and RSI.
How to Trade Using Keltner Channel Indicator?
Similar to most other technical indicators, Keltner Channels can be employed to trade using several different trading methods. Some of the most popular trading strategies in which you can leverage the Keltner Channels are as follows –
- Breakout Trading Strategy
- Bollinger Squeeze Trading Strategy
- Trend Pullback Strategy
- Overbought and Oversold Trading Strategy
Now, without further ado, let us briefly discuss how you would go about using Keltner Channels with each of these above-mentioned trading strategies.
Trading Strategy 1: Breakout Trading Strategy
The Breakout Trading Strategy is perhaps the most popular and widely traded strategy involving the Keltner Channels. Breakout Trading is a relatively easy to implement strategy and can be applied to other Channel or Envelope Indicators as well.
Before getting into the specifics of this strategy, let us revisit a few important pointers for using Keltner Channels to trade breakouts. These pointers are –
- When calculating the upper and the lower bands of the Keltner Channel Indicator, the larger the multiple of ATR, the fewer will be the breakouts that occur. Additionally, with a large ATR multiple, the frequency of breakouts will be lower and the reliability of these signals will be higher.
- Thinner Keltner Channels would generally provide more trading signals when using the Breakout Strategy. However, the thinner the channel, the higher would be the need for you to rely on other complementary indicators for trade confirmation signals. This is because, with the increase in the frequency of breakout signals, the reliability of signals generated by the Keltner Channel Indicator takes a hit.
Now that we have these fundamentals out of the way, let us discuss how you would determine your trade entry, stop loss and take profit targets when trading breakouts using the Keltner Channels.
Determining Trade Entry
The Breakout Trading Strategy is triggered when the actual price crosses over one of the outer bands of the Keltner Channel, suggesting an impending change in trend. Additionally, if the price action was hovering between the middle line and an outer band, a cross over the middle line can be used to indicate a breakout as well.
Depending on the trader you engage with, the exact definition of a breakout from the channel can vary. Some traders suggest that a breakout occurs when a price candlestick falls completely outside of the channel, while others suggest only the close price needs to be outside the channel. That being said, irrespective of the breakout definition that you choose to follow, it is always a good idea to wait for confirmation signals from complementary tools before entering a breakout trade using Keltner Channels. Some traders also suggest using multiple outer bands, calculated using different multiples of ATR, on the price charts to understand the reliability of various breakouts.
As far as the trading breakouts in itself using the Keltner Channel goes, below is how you will determine your trade entries –
- You will enter a long trade, meaning buy the asset that you are trading when the price crosses the upper band. You do this with an anticipation that the price will continue to rise.
- Similarly, when the price crosses the lower band of the Keltner Channels, you will sell or short-sell the asset being traded using this strategy.
Determining Stop Loss Target
As with other methods to identify the breakout trades, there is a chance that a breakout identified using the Keltner Channel Indicator is a false breakout. This will result in the price returning to the normal range within the bands and can often lead to losses. Therefore, as a trader, you must always place a stop-loss for your breakout trades to minimize potential losses.
With Breakout Trading Strategy, as with any other trading strategy, the exact stop-loss target would depend on your risk tolerance and risk appetite. However, setting Stop Loss a few points below the upper band for bullish trades, and a few points above the lower band in the case of bearish trades is reasonable for most trading conditions.
Determining Take Profit Target
With the Breakout Trading Strategy, the idea is to use the Keltner Channels to get an indication of an upcoming high momentum move in the market before the price change actually accelerates. Hence, you would want to book profits and exit trades taken using this strategy once that momentum in price change dies.
Therefore, below is how you would determine your take profit targets under the Breakout Strategy.
- When in a bullish trade triggered by a breakout from the upper band, wait until the bull rally has peaked, and exit the trade for profit once the price returns to the middle line.
- Similarly, when taking a sell or a short-sell position with the Breakout Strategy, you will close your trade for profit once the momentum of price decline dies down and the price returns to the middle line of the channel.
Additionally, by leveraging other complementary signals, such as Divergence, you can further optimize your trade exits and thereby book even bigger profits.
Trading Strategy 2: Bollinger Squeeze Strategy
When Bollinger Bands and Keltner Channels are used in conjunction with each other, traders can watch for a “Bollinger Squeeze” to identify possible trading opportunities.
Bollinger Bands are quicker to respond to the changes in market volatility than Keltner Channels. Hence, when there is a sudden reduction in the price variability of an asset, the Bollinger Bands shrink and for several trading sessions completely submerge within the bounds of the Keltner Channels. This formation is called a squeeze. Hence, the squeeze occurs when the Bollinger Bands are completely inside of the Keltner Channel.
In principle, the squeeze indicates a period of low price fluctuation and minimal market activity. While this might seem benign, this formation instead suggests an impending change in volatility. This is because it is not normal to have a flat trend. Traders will either become scared by the flat trend and pull out of the asset, or they will drive up the demand in the belief that the asset is undervalued.
Hence, by using both these indicators, the Bollinger Bands and the Keltner Channels, you can get a confirmation for a considerable decline in volatility that, in turn, strongly indicates a possible rally or a dip. This is the theory on which the foundation of the Bollinger Squeeze Strategy rests.
Now that we have discussed the theory behind the Bollinger Squeeze Strategy, let us briefly discuss how you will implement this strategy for making trading decisions in the following subsections.
Determining Trade Entry
In essence, under the Bollinger Squeeze Strategy, you enter the market with a buy or a sell trade just outside of the Bollinger Bands’ outer limits.
But, before entering any trade, you must first establish that it is truly a squeeze that you are dealing with on the price chart. For this reason, I would recommend that you wait until five price candles have squeezed (that is to say, five trading sessions have passed) before acting on a squeeze signal.
Using the above-stated recommendations, once you confirm that it is in fact a squeeze pattern that you are dealing with, you can use the below-stated guidelines to enter a trade with this strategy –
- Enter a bullish or a long trade, when the price breaks above the upper band of the Bollinger Bands Indicator, in anticipation that the uptrend will continue.
- Similarly, enter a bearish or a short-sell trade when the price breaks below the Bollinger Bands’ lower band.
Determining Stop Loss Target
With Bollinger Squeeze Strategy, you expect the price change to pick momentum and rally soon after getting a buy or a sell signal. Hence, it is advised to use a conservative Stop Loss with trading this strategy.
Below is how you can determine your Stop Loss level with the Bollinger Squeeze Strategy –
- When taking a bullish or a long trade, you would place your initial stop loss just a few points below the Bollinger Bands’ upper band. Once the price change picks momentum in the anticipated direction, you can then switch to a trailing stop loss as the bull rally continues.
- Similarly, in the case of a bearish or a short-sell trade, put your initial stop loss a few points above the Bollinger Bands’ lower band. And, once the price picks momentum, you can switch to a trailing stop loss.
Determining Take Profit Target
First, there is no hard and fast rule on closing a trades for profit that applies specifically to this trading strategy. However, when determining to take profit targets, you can take an approach very similar to Breakout Trading with this strategy. This is because, in essence, Bollinger Squeeze Strategy is simply a method to identify breakouts from the Keltner Channel early.
Hence, below is how you can determine the Take Profit targets for your trades under this strategy –
- In the case of long trades, you would exit your position for profit once the price returns to the middle line of the Keltner Channel post-breakout.
- Similarly, when taking a sell or a short-sell trade, you would also close your position for profit when the price momentum declines and the price returns back to the middle line of the Keltner Channel post-breakout.
Trading Strategy 3: Trend Pullback Strategy
The Trend Pullback Strategy is similar to the Breakout Trading Strategy and can only be effective in a market that has a strong trend. Hence, momentum readings from complementary technical indicators such as the MACD and the RSI, are a must-watch when executing this strategy.
In essence, this strategy is simply a conservative approach to taking breakout trades. High level, in this strategy, after the price breaks beyond the outer bands of the Keltner Channel, instead of directly entering a breakout trade, you wait for a pullback in the form of a continuation chart pattern instead.
Since price breakouts are less likely to occur in a non-trending market, this cannot be your go-to trading strategy in non-trending market conditions. Therefore, you must note that if the price is simply oscillating in a lateral movement, with no definite trend, this method would be less effective in identifying potential trades.
Determining Trade Entry
As mentioned above, for the Trend Pullback Strategy to work, the existence of a strong trend (either bullish or bearish) is the key requirement. In addition to the existence of a strong trend, you will also need a strong understanding of various Continuation Chart Patterns – such as the Flag or the Pennant Pattern to trade using this strategy.
With that said, under this strategy, you can enter a trade using the below-stated guidelines –
- Watch for times when the trend is strongly bullish or bearish.
- A “Pullback” occurs after the price first breaks out of the outer band, then briefly re-enters the channel, and then finally resumes its upward (or downward) trend outside the bounds of the Keltner Channel.
- After this initial Pullback, if a Continuation Chart Pattern forms, it can be treated as a confirmation signal that the prevailing trend would continue.
- Depending on the direction of the prevailing trend, enter a buy or a sell trade on the price breakout from the Continuation Chart Pattern.
Determining Stop Loss Target
With the Trend Pullback Strategy, you can put the stop loss for your trades using the following guidelines –
- In the case of bullish trades, you would put your stop loss just a few points below the middle line of the Keltner Channel.
- Similarly, when entering a bearish trade, your stop loss will be selected a few points above the middle line of the Channel.
Following the above-stated guidelines, you will be protected against any major losses should the price momentum actually turn counter to the prevailing trend.
Determining Take Profit Target
As you would have noted, the Trend Pullback Strategy is essentially a conservative version of the Breakout Trading Strategy.
Hence, the key principle of closing trades for profit in this strategy remains the same. In this strategy, you would want to close the trade for profit, once the momentum of the prevailing trend dies down and the price returns to the middle line of the Keltner Channel post the breakout.
Trading Strategy 4: Overbought and Oversold Trading Strategy
Overbought and Oversold is the simplest trading method in which you can leverage the Keltner Channels.
When the price action is systematically outside of the channel or hovering around an outer band, and the trend is flat, it is an indication that the asset is an “overbought” or “oversold” condition, and prompts a trade.
This is different from a breakout, which can signify a rally or a dip. In this scenario, the price candlesticks will remain outside of the channel for a prolonged period. Yet, the channel will remain flat, neither bullish nor bearish, implying that the prices are artificially high or low.
Determining Trade Entry
As you can imagine, due to its simplicity, trading with the Overbought and Oversold Strategy is relatively easy. You can leverage the below-stated guidelines for entering a trade using this strategy –
- When the price hovers around the lower band of the Keltner Channel for an extended period of time, it represents an oversold condition. Hence, you will enter a long trade in such conditions.
- Similarly, in cases where the price hovers around the upper band of the channel for a prolonged duration, it signals an overbought condition. Therefore, you will enter a short or a short-sell trade in such situations.
Determining Stop Loss Target
Determining stop loss with the Overbought and Oversold Trading Strategy is also not very tricky. In this strategy, you can determine the stop loss targets for your trades using the below-stated guidelines –
- In the case of a bullish or a long trade, you would put the stop loss for your trades a few points below the bottom of the price range.
- On the other hand, when entering a bearish or a short-sell trade, your stop-loss target will be a few points above the top of the price range.
Determining Take Profit Target
Irrespective of whether a security is in an overbought or in an oversold condition, it will eventually return to a neutral state.
In fact, by selling an overbought asset and by buying an oversold asset, you as a trader, contribute towards getting the asset to a neutral condition.
In the case of a Keltner Channel, this neutral state is represented by the exponential moving average (EMA) or the middle line. Hence, irrespective of whether you are taking a buy or a sell trade, with this strategy, you would put the take profit target for your trade at the middle line of the channel.
Day Trading with Keltner Channel Indicator
With the advent and the popularity of apps such as Robinhood and Acorns, and with the growing usage of smartphone apps from traditional brokerage companies such as Charles Schwab and Fidelity, Day Trading has captured the interest of many traders.
If you are one such trader, wanting to Day Trade using the Keltner Channels, you might find the following tips very helpful –
- To use Keltner Channels for Day Trading, set the intervals measured to shorter, intra-day periods (rather than a 20 day period).
- The Breakout Strategy is applicable for Day Trading but should be avoided towards the second half of the day.
- Overbought or oversold markets can be low-yield but is a low-risk strategy taking day trades.
- As with other Day Trading techniques, it is better to set a stop loss for your trade that is more conservative.
Advantages and Limitations of Trading Keltner Channel Indicator
The Keltner Channel Indicator is a reliable technical analysis tool to analyze tradable securities. But, just like any other technical indicator, it is far from perfect.
Keltner Channels have their own set of advantages and limitations, and as a trader, you must keep them in consideration when trading using this indicator. Therefore, in the following sections, let us discuss some common strengths and weaknesses of this indicator.
Advantages of Trading Keltner Channel Indicator
Listed below are some common advantages of trading Keltner Channels –
- For characteristically stable assets, Keltner Channels do an excellent job indicating disposition changes in the market.
- Keltner Channels can identify breakouts earlier than several other Channel or Envelope Indicators.
- The less volatile the asset, the more information to empower trading decisions can be attained using the Keltner Channel Indicator.
Limitations of Trading Keltner Channel Indicator
Listed below are some commonly known limitations of trading Keltner Channels –
- During very volatile markets, or for characteristically volatile assets, Keltner Channels are limited in their predictability and cannot signal appropriate times to trade.
- Because Keltner Channels use moving averages, they often lag behind the price.
- Keltner Channels are not as widely used as some other Channel or Envelope Indicators, such as – Bollinger Bands. Thus, there can be limitations to their serviceability on several charting platforms.
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Conclusion
In conclusion, the Keltner Channel Indicator is a reliable tool with predictive powers to forecast the upcoming changes in price action. These can be used to monitor trends and signal trades if the price action is out of the expected range.
Their function as volatility indicators is very similar to that of the Bollinger Bands, which are more commonly used, but they are less volatile than the Bollinger Bands, and therefore, in certain trading conditions, can be more reliable.
Finally, as with all indicators and tools in technical analysis, one must be aware of external reasons for changes in trends, volatility, or price that can never be captured with pure, raw data.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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