The trading world is full of trading strategies that vary by assets, timeframes, and, of course, technical indicators. In this article, you will learn the Keltner Channel trading strategy.
Keltner Channel Indicator: Basics
What is Keltner Channel? Before we explain the trading strategy, we need to explain what the Keltner Channel is. The Keltner channel is a technical indicator that looks like a Bollinger Bands trading tool and belongs to a family of envelope indicators.
Envelope indicators are presented by a dynamic channel formed with upper and lower bands. The channel serves to define resistance and support levels.
The Keltner Channel is placed on the price chart and moves near the price. Thus, there are different types of strategies that include the Keltner Channel. These strategies are based on bands’ breakouts and price movements within the dynamic channel.
Keltner Channel Strategies
We will consider three main market conditions when the Keltner Channel indicator strategies can be applied. These conditions cover all key functions of the Keltner Channel indicator.
As the price always fluctuates, moving from strong trends to consolidation periods, you need an indicator that will catch all the movements and provide signals on the upcoming trades. The Keltner Channel indicator should definitely be among your tools.
One of the greatest benefits of the indicator is that it can be used with various trading tools and implemented in numerous trading strategies.
As the Keltner Channel indicator is an effective tool while measuring market volatility and defining anomalies in the price behavior, it is widely used in breakout strategies.
In this example, we will combine the Keltner Channel and the ADX indicator as the Keltner Channel provides delayed signals.
The ADX tool serves to define the breakout strength. If the ADX is above 20 level, it is a sign of the possible beginning of a trend (bearish or bullish). A reading below the 20 level is a signal of market consolidation. As we talk about breakouts, the ADX indicator should rise to confirm the strength of the newly forming trend.
The strategy is simple and applies both to bearish and bullish positions.
If you see the following conditions, you can open a trade in the direction of the breakout:
- Keltner Channel bands should move horizontally.
- Price breaks either above the upper band or below the lower band.
- The ADX indicator crosses above the 20 level and keeps rising.
This trading strategy helps traders avoid false breakouts.
The Keltner Channel can also be a useful tool when trading ranging markets. Although it’s a tricky thing to open trades when the price consolidates, this tool can allow you to go through challenges.
The price is expected to move near the middle band during the ranging market, hardly approaching upper/lower bands.
For this strategy, you need to combine the Keltner Channel with the RSI oscillator. Although the standard settings for the RSI are 30 and 70 levels, this strategy requires changing them to 10 and 90. Such parameters will help us define tops and bottoms more efficiently.
Conditions of the buying ranging market strategy:
- Keltner bands should move horizontally, which is a sign of consolidation.
- The price should break below the middle band.
- The RSI should go below the 10 level. It’s a signal of the oversold market, which should lead to an upward reversal.
- The Stop Loss order should be placed on the bottom band.
- The Take Profit order can be placed when the RSI breaks above the 90 level.
The opposite strategy can be applied to the sell trade.
Pullback trading can be successful if only you trade during a sharp trend. The Keltner Channel helps identify the strength of the market. Thus, it can be useful when trading pullback.
Again, we need to combine the Keltner Channel with another indicator to get a reliable signal. In this strategy, we will use the RSI with 20 and 80 levels as borders for oversold and overbought zones.
Conditions of the buying pullback strategy:
- The strong trend is confirmed when the price moves near one of the bands; let’s say it hugs the band.
- The price should move down towards the middle band.
- The RSI indicator should be below the 20 level, thus, in the oversold area.
- The long trend can be opened with a Stop Loss order at the lower band.
- The profit can be taken as soon as the RSI crosses the 80 level bottom-up.
- The opposite conditions can be applied to the short trade.
The Keltner Channel is not a widely used technical indicator. Still, it’s highly efficient and can be used in a wide range of trading strategies. Although this technical tool provides delayed signals, its key function is price movement determination. Usage of the Keltner Channel with other indicators limits risks of lagging signals.