Keltner channel strategy forex

A surge above the upper channel line shows extraordinary strength, while a plunge below the lower channel line shows extraordinary weakness. Such strong moves can signal the end of one trend and the beginning of another. With an exponential moving average as its foundation, Keltner Channels are a trend following indicator.

As with moving averages and other trend-following indicators, Keltner Channels lag price action. The direction of the moving average dictates the direction of the channel. In general, a downtrend is present when the channel moves lower, while an uptrend exists when the channel moves higher. The trend is flat when the channel moves sideways.

A channel upturn and break above the upper trend line can signal the start of an uptrend. A channel downturn and break below the lower trend line can signal the start a downtrend. Sometimes a strong trend does not take hold after a channel breakout and prices oscillate between the channel lines.

Such trading ranges are marked by a relatively flat moving average. The channel boundaries can then be used to identify overbought and oversold levels for trading purposes. Many consider this a plus because it creates a more constant width. This makes Keltner Channels well suited for trend following and trend identification.

Second, Keltner Channels also use an exponential moving average, which is more sensitive than the simple moving average used in Bollinger Bands. Notice how the Keltner Channels are smoother than the Bollinger Bands. ADM was in a clear downtrend in April-May as prices continued to pierce the lower channel. With a strong thrust up in June, prices exceeded the upper channel and the channel turned up to start a new uptrend.

Notice that prices held above the lower channel on dips in early and late July. Even with a new uptrend established, it is often prudent to wait for a pullback or better entry point to improve the reward-to-risk ratio. Momentum oscillators or other indicators can then be employed to define oversold readings. This chart shows StochRSI , one of the more sensitive momentum oscillators, dipping below.

The subsequent crosses back above. After this initial break, the stock met resistance near the day EMA middle line from mid-May until early August. The inability to even come close to the upper channel line showed strong downside pressure. A period Commodity Channel Index CCI is shown as the momentum oscillator to identify short-term overbought conditions.

A move above is considered overbought. A subsequent move back below signals a resumption of the downtrend. This signal worked well until September. These failed signals indicated a possible trend change that was subsequently confirmed with a break above the upper channel line. Flat Trend Once a trading range or flat trading environment has been identified, traders can use the Keltner Channels to identify overbought and oversold levels.

The chart below shows IBM fluctuating between support in the area and resistance in the area from February to late September. The indicator window shows ADX black line confirming a weak trend. Low and falling ADX shows a weak trend. High and rising ADX shows a strong trend.

ADX was below 40 the entire time and below 30 most of the time. This reflects the absence of a trend. Armed with the prospects of a weak trend and trading range, traders can use Keltner Channels to anticipate reversals. This is a slight variation, and both indicators do tend to generate the same signals at the same time. While both indicators are valid, they are often traded quite differently.

The Average True Range is an indicator that many day traders use, so it is worth noting that it makes a certain amount of sense to pay attention to it. Once a market breaks 2 x of the ATR, it sends quite a strong message about the direction of a trend, so there is something especially logical and appealing about using a Keltner Channel if you are seeking an indicator to signal this kind of thing. Keltner Channel Trading Strategies Here are three of the most popular Keltner Channel trading strategies: Pullback Strategy The pullback strategy is a popular Keltner Channel trading strategy which involves buying pullbacks in an uptrend or selling rallies in a downtrend.

The idea is that a market that breaks out of the channel and then pulls back to the Middle Line should find traders willing to step in and bet on a continuation of the trend. The price needs to break out of the Keltner Channel before you should look for a pullback. The idea is to enter a trade at the start of the move, and as a result, you may have a higher number of losers, but you will catch the bigger moves to compensate.

The Keltner Channel needs to be horizontally flat before you look for an entry with this strategy. Once the price breaks the top or bottom of the channel, you enter in the direction of the breakout, hoping for sustained movement.

If the trade moves nicely into profit, it can be helpful to not exit the trade until the price breaks back to the other side of the Middle Line of the Keltner Channel. This strategy will quite often produce a few small losses and then a significant gain here and there to make it profitable overall. This can be a great strategy for catching bigger trend moves.

Keltner Channel Breakout Combining the Trend-Pullback and Breakout Strategies Some traders will use a combination of these two strategies to enter and exit the markets. The most aggressive version adds to an existing position on pullbacks to the Middle Line that bounce again. Another way this strategy combination can be used is for stop loss placement. Keltner Channel Breakout and Pullback Combined Entries Final Thoughts Like any other indicator, Keltner Channels are not perfect, but they do indicate when the price is trending, and whether the price is exceeding the typical Gaussian range of deviation from the middle of that trend.

As always, the longer the look-back period and the higher the time frame you use it on, the more accurate the indicator will be, up to a maximum of approximately 6 months to 1 year in the Forex market.

There are limitations to all trading indicators, as there is always a struggle between signal and noise. The Keltner Channel indicator should be tuned to your trading style. It is important to keep in mind that Keltner Channels are lagging indicators, meaning that they are based upon historical data, and so you can get whipsawed during trend changes as multiple signals can be generated very quickly.

This is seen in all lagging indicators and is not unique to the Keltner Channel. Setting up Keltner Channels in MT4 or MT5 is a bit more difficult than other indicators, as most brokers do not include the indicator within their platform presets. However, you can download it for free from several internet sites and add it to your MetaTrader platform.

The better indicator will come down to the way an individual trades. The main difference is that the Keltner Channel represents volatility using the high and the low prices of a specific timeframe, while Bollinger Bands represent standard deviation. The Keltner Channel typically gives you a smoother channel than Bollinger Bands do. What is the Keltner Channel indicator? These preset values can be customized and changed by the trader.

Is the Keltner Channel a lagging indicator? The Keltner Channel indicator is a lagging indicator. It is like moving averages and other trend-following indicators, as the trend dictates the direction of the channel. Usually when traders use these indicators, they will change the default settings for one of them.

The idea behind using both together is that if the Bollinger Bands and the Keltner Channels both give signals in the same direction, that is when you buy or sell, based upon what they both tell you. What are the default settings for the Keltner Channel?

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Examples of Trading Forex with a Keltner Channel Strategy Many experienced FX traders prefer to combine multiple uncorrelated technical signals to confirm the trend before placing their live trade orders. When you are trading with a Keltner channel strategy, you should try to apply an additional technical indicator to bolster the strength of the Keltner signal.

In the following three examples, we will discuss how you can trade three different market conditions by combining a second technical indicator and build a comprehensive Keltner channel trading system. Example of Using Keltner Channel for Trading Breakouts One of the best applications of Keltner channel in Forex is using the indicator to trade breakouts. Breakouts occur when the price ends a previous consolidation and starts a new trend. However, if you only rely on the Keltner channel to trade breakouts, you may find that you are seeing a lot of false signals.

The best way to trade a breakout scenario with the Keltner channel would be to combine a trend signal indicator like the Average Directional Index ADX. However, savvy Forex traders would not merely place a BUY order at this point because the Average Directional Index indicator value Blue line was still below the reading of Many experienced Forex traders only consider a market to be trending when the Average Directional Index reading is above 20 to 25, and where the trend intensifies when the ADX indicator reading goes above 40 to 45 level.

Hence, once the Average Directional Index reading reached above the 25 level, then you could have considered placing the BUY order with your broker. The trickiest part of trading breakouts using a Keltner channel strategy is to know exactly when you should time your market entry. You should try to identify a psychological resistance level during an uptrend and a support level during a downtrend, once the following two conditions are met. The price has penetrated and closed above the Upper channel or closed below the lower channel and started an uptrend or downtrend.

Average Directional Index confirms the start of the trend by showing a reading above 25 On this occasion, we found the resistance to be around the 1. Example of Using Keltner Channel to Trade Retracement Pullbacks Aside from breakout opportunities, the Keltner channel can also provide you with retracement signals.

Moreover, if you are already in the trade, you can also use these retracement pullback opportunities to increase your position size. Figure 4: Trading Pullbacks with Keltner Channel and Stochastic Divergence In figure 4, we have applied the Stochastic indicator in combination with Keltner channel to find a retracement pullback trading opportunity.

To trade using this strategy, first, you need to wait for the price to confirm the trend by breaking above or below the upper or lower Keltner channel. Once the trend is confirmed, you should wait for the price to start a retracement and reach near the middle band of the Keltner channel, which is the period Exponential Moving Average.

The price can retrace back and reach all the way to opposite Keltner channel as well at times. The key here is that the price cannot break and close on the other side of the Keltner channel, which would signal a potential reversal of the trade. The third thing you need to watch in this pullback strategy is the Stochastic indicator reading to gauge when the market is overbought or oversold.

Here, the price reached near the middle band of the Keltner channel and the Stochastic indicator turned overbought, signaling a potential trend continuation to the downside. In addition to that, we also found a stochastic divergence on the price chart, which significantly improved the odds of the trade. However, it is not necessary that you wait for a stochastic divergence to use this Keltner channel strategy.

A stochastic overbought signal during a confirmed downtrend would be sufficient to confirm a potential trend continuation. The trigger for this Keltner channel pullback strategy is a price penetration below the low of the bar that signaled the stochastic overbought condition. As you can see, we have identified this particular bar with the black arrow on figure 4. Example of Using Keltner Channel During a Range Bound Market Besides trending markets, if you are looking to trade during a range bound market, you can still utilize the Keltner channel and Average Directional Index combination.

The beautiful thing about combining these two indicators is that during a consolidation period, the upper and lower Keltner channels will act as resistance and support , where the Average Directional Index will confirm if the market is ranging or a new trend is likely to take place. As the Average Directional Index indicator reading remained below the 25 level, it confirmed that there is no underlying directional movement or trend in the market. Such market condition constituted a textbook sideways or ranging market, and it provided a trade opportunity if you knew how to read price action bars.

Click Here To Download Conclusion Like other envelop based technical indicators, Keltner channel has its positive points and shortcomings. However, if you spend some time understanding the formula behind the indicator and combine it with other technical indicators to develop a trading strategy fit for different market conditions, such trading systems can generate positive returns to your bottom line.

It is worth noting that as of this writing, the popular Forex charting software MetaTrader 4 platform does not include any built-in indicator for plotting the Keltner channels. In order to draw mt4 Keltner channel, you can opt to download a third-party developed Keltner channel indicator. There are several versions of the Keltner channel indicator readily available for downloading at the official forum of MetaTrader 4 platform, the MQL4 Programming Forum.

The main reason is due to false breakouts or fake outs. These happen when the price breaks out of a channel temporarily, only to return to previous levels. If you have entered a position in the breakout direction, it will usually result in a loss. All ebooks contain worked examples with clear explanations. Learn to avoid the pitfalls that most new traders fall into.

The other consequence of this is that the drawdown is large as a percentage of the profit. Keltner Bands Strategy With the classic approach, the break of the channel obviously depends on how you set up the indicator. The greater this multiple is the wider will be the channel. So why trade one and not the other? Banding method Instead of using a simple crossover approach as above, the strategy I prefer is to look at a whole range of points on the chart and see where the market strength lies.

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