What is the Keltner Channel and how to plot it on the chart: how to use the indicator, Keltner Channel settings, how it works for binary options. The Keltner-channel refers to a
technical analysis indicator that consists of three separate lines. It includes the center line of the
moving average along with the channel lines above and below the center line.
- What is the Keltner channel and how it works
- How the Keltner Channel indicator is calculated
- Modern calculation
- Best channel settings
- Installing and configuring the Keltner channel indicator
- How to Use the Keltner Channel to Determine Market Conditions
- Trading strategy based on the Keltner channel
- Keltner channel is trending
- How to determine the state of the market using the Keltner channel
- How to use the Keltner channel to predict market turning points
- Keltner Channel vs. Bollinger
- Pros and cons of application
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What is the Keltner channel and how it works
The Keltner Channel is a technical analysis indicator that consists of several independent lines. It consists of a center line, a moving average, and channel lines above and below the center line.
The term “channel” describes a technical analysis indication that consists of three separate lines. In addition to the moving average center line, this equation includes channel lines that are above and below the center line.
The Keltner Canal was named after US grain merchant Chester Keltner. Keltner was a pioneer in the commodity trading industry.
As a result of the changes, the current version of the indicator uses the exponential moving average of price as the centerline. The Keltner Channel in Forex is widely used by technical analysts and can be used as the basis of two different trading strategies. It bears a strong resemblance to
Bollinger Bands , although the output of the indicator is calculated on a different basis.
How the Keltner Channel indicator is calculated
Knowing how the indicator is calculated is not required. Few people on Wall Street can explain how most of these numbers are calculated. In any case, the Keltner channel is calculated in three steps:
- First, a 20-day moving average is calculated.
- Secondly, the upper line of the channel is calculated. Calculated using the following formula: 20-day EMA + (2 x ATR(10)).
- Thirdly, the lower channel line is calculated using this formula: 20-day EMA – (2 x ATR(10)).
As always, you can change these values depending on your trading strategy.
Currently, the Keltner channel is mainly used with a 20-period exponential moving average. The exponential moving average highlights recent price action over time. The shorter the EMA period, the more weight will be applied to the most recent value. In addition, traders use multiples of the Average True Range (ATR) to add/subtract to the moving average.
- Average Keltner Band = 20 Exponential Moving Average.
- Upper Keltner Band = Exponential Moving Average + (Average True Range x multiplier).
- Lower Keltner Band = EMA – (Middle True Range x multiplier).
Best channel settings
Traders typically use a 20-period EMA and a multiple of 2 of the Average True Range (ATR) to calculate the Keltner Channel indicator:
- EMA settings over 50 make the Keltner channel less sensitive. This will result in fewer but higher quality signals.
- EMA settings below 20 make the Keltner channel too sensitive. This will lead to more noise in the market. Lower settings on the Keltner channel should be carefully checked as this can lead to many false signals.
In addition, many traders prefer to correct multiples of the Average True Range (ATR).
The Average True Range (ATR) indicator is a very useful tool for measuring volatility. The average true range measures the price range of an instrument – the higher the volatility of the instrument, the higher the ATR. Other common multiples used by traders are 1, 1.5 and 2.5. This multiple is adjusted depending on the market that traders are analyzing:
- Higher multiple average true range values will widen the channel. This will result in fewer but higher quality signals.
- Smaller values of the average true range will narrow the channel by a factor. This will lead to more noise in the market.
Installing and configuring the Keltner channel indicator
The Keltner channel indicator should be looked for in the standard
MT4 or MT5 in the “Library” section. It is located at the bottom of the program. You can also download and move to the appropriate Metatrader folder (Indicators). As soon as the program is restarted, it will become available and will appear with the rest of the indicators (KeltnerChannels.mq4). The MT version has 3 customization options available (in this case, the standard color and thickness changes do not count). All options change the parameters of the middle line only: “Mode MA” – selection of the type of MA (simple, exponential, etc.), “MA Period” – setting the MA period and “Price Type” – determining the type of prices (3, 4, 5 ). In this case, like other indicators (for example, Ishimoku), this one is also completely unsuitable for short timeframes.
It should also not be used on charts smaller than H1. Otherwise, there will be a lot of unnecessary “noise”.
How to Use the Keltner Channel to Determine Market Conditions
Markets are constantly evolving. These include uptrends, downtrends
consolidation . Determining the current state of the market is easy by looking at the charts. But in real time it is much more difficult. However, there are ways to determine the state of the market in real time. To do this, you need the Keltner Channel indicator and a moving average with a period of 200:
- If the entire Keltner channel is below the 200 MA, the market is in a downtrend.
- If the entire Keltner channel is above the 200 MA, the market is in an uptrend.
- If the MA200 is within the Keltner channel, the market is in a price range.
If the market is growing, you should consider buying. If the market falls, it is better to think about selling. If the market consolidates, you can buy or sell on its borders.
Trading strategy based on the Keltner channel
The general rule of all channel related indicators is that they are designed to capture price action. Therefore, any move that occurs outside of the channel must be carefully considered. In this case, when the price moves above the upper line, it shows significant uptrend strength. A good example of channel action is shown in the ETH/USD pair below.
As you can see above, the price of the pair was above the upper line of the Keltner channel when the price moved up. The opposite happened when the price fell. The price was below the lower line of the Keltner channel.
Keltner channel is trending
Keltner channels are widely used in trending. This is a strategy in which an existing trend is bought. Therefore, if the price of an asset falls, it will remain in a downtrend as long as the price is below the three Keltner channel lines. This trend will be invalidated if the price manages to rise above the lower channel line as shown below. You can use the same strategy during a downtrend.
How to determine the state of the market using the Keltner channel
Traders can use the Keltner channel to determine the direction of a trend. When placed on a chart, the indicator is displayed as three lines. When the price breaks above the upper part of the line, this indicates that an uptrend is beginning, while, conversely, a break below the lower line indicates that a downtrend is beginning. Traders use these signals to enter trades based on momentum and directionality, especially when the channel has been flat and nearly horizontal for a while. In most cases, in the absence of trend conditions, the price will fluctuate between the upper and lower lines of the indicator, suggesting that they can act as support and resistance. This is when traders can use the indicator to trade reversals rather than trend continuation: buy,
How to use the Keltner channel to predict market turning points
You should not create a sell position just because it is at the upper border of the Keltner channel. This is due to the fact that in a strong uptrend, the overbought condition can last for a long time. In a downtrend, the opposite is true. The Keltner Channel is in a strong uptrend.
In extreme market structures, prices tend to reverse direction. For example, when prices reach support or resistance. The price must be above the Keltner channel. This indicates that the market has moved away from the mean and is at an extreme level.
However, there is no need to rush into long positions. With a strong downtrend, prices can stay near the lower border of the channel for a long time. Therefore, more signals are needed to restore the market. Useful support and resistance levels. The price should bounce at these levels.
You can see the following:
- The price closes outside the lower boundary of the Keltner channel.
- The price reaches the support line.
- Ideally, the rise in price should show up in a price action pattern (pin bar, engulfing pattern).
The opposite is true for short-term positions. Keltner channel for binary options – trading strategy, how to use the indicator correctly: https://youtu.be/0EGYlfUUXH8
Keltner channels are basically volatility channels because they include ATR in their calculation. The average true range is one of the most useful technical indicators as it helps a trader decide where to place a stop loss or profit target, or if they should enter a trade in the first place.
- Wide range of Keltner channels show high volatility
- The narrow ranges of the Keltner channels suggest low volatility.
Keltner Channel vs. Bollinger
Compared to Bollinger Bands, Keltner channels are smoother. This is because the width of the Bollinger Bands is based on a standard deviation, which is more variable than the average true range. In addition, Keltner Channels use an exponential moving average, which is more sensitive than the simple moving average used in Bollinger Bands calculations.
Pros and cons of application
Among the advantages are the following:
- Great for determining the current market trend.
- A good indicator to measure market volatility.
- Useful for identifying overbought and oversold areas on a chart.
Cons of the Keltner channel:
- It does not contain all the data needed to properly analyze price action, so it should be used in conjunction with other tools.
- Poor identification of cycle turns, giving many false signals
The Keltner Channel is an Envelop-based indicator. It is similar to the Bollinger Band with the upper, middle and lower channel line, but the way it is calculated is different. So, a price reversal is likely to occur when price closes outside of the outer channel line and moves into a key market structure. If the price closes outside the outer channel line, you should avoid trading in the same direction as it is reversing. A Keltner channel squeeze occurs when price holds back between the 20MA and the outer channel line, signaling that the market is about to erupt.
- 1 What is the Keltner channel and how it works
- 2 How the Keltner Channel indicator is calculated
- 3 Installing and configuring the Keltner channel indicator
- 4 How to Use the Keltner Channel to Determine Market Conditions
- 5 Trading strategy based on the Keltner channel
- 6 Keltner channel is trending
- 7 How to determine the state of the market using the Keltner channel
- 8 How to use the Keltner channel to predict market turning points
- 9 Volatility
- 10 Keltner Channel vs. Bollinger
- 11 Pros and cons of application