The Keltner Channel is a simple but powerful trading indicator.
It helps you better time your entries, improve your winning rate, and can even “predict” market turning points.
And if you want to learn how to do it, then today’s post is for you.
What is a Keltner Channel and how does it work?
This means it has an upper and lower boundary to help you identify potential “overbought and oversold” levels.
Note: The Keltner Channel used in this post is the modified version by Linda Rasche.
Now, the default Keltner Channel settings have three lines to it:
- Middle Line: 20-period Exponential Moving Average (EMA)
- Upper Channel Line: 20 EMA + (2 * Average True Range)
- Lower Channel Line: 20 EMA – (2 * Average True Range)
You can think of the Middle Line as the mean.
And the Upper and Lower Channel Line shows you how far the price is away from the mean.
Here’s how it looks like…
If you use TradingView, you can find the Keltner Channels under the “Indicators” tab…
There really aren’t any best Keltner Channel settings, because it depends on your trading timeframe and why you’re using it.
(So don’t bother too much about finding the best Keltner Channel settings.)
Keltner Channel vs Bollinger Bands, what’s the difference?
The difference is the way Channel Lines are calculated.
Keltner Channels use Average True Range and Bollinger Bands use Standard Deviation.
And if you compare the two, you’ll realize Keltner Channel is “smoother” compared to Bollinger Bands.
Don’t make this common mistake when using the Keltner Channel indicator
Here’s the deal:
You don’t buy just because the price is at the upper band of the Keltner Channels.
Because in a strong uptrend, the price can remain “overbought” for a long period.
(And vice versa for a downtrend.)
Here’s what I mean…
Continuously overbought levels at USD/TRY Daily timeframe:
How do you use the Keltner Channel?
Well, that’s what I’ll cover next.
How to use Keltner Channel to “predict” market turning points
Here’s something you might not know…
You’re probably thinking:
“But how do I identify an extreme move?”
That’s where this Keltner Channel strategy comes into play.
All you need to do is, look for the price to close outside the Keltner Channel.
This tells you the price is at an extreme level — far from the mean.
Closed outside the Keltner Channel at USD/JPY Daily timeframe:
“Oh, the price has closed outside of the Lower Channel Line. Time to buy!”
Not so fast, my young padawan.
In a strong downtrend, the market can “hug” the Lower Channel Line for a long period.
That’s why you need another signal to tell you the market is likely to reverse higher.
So, what is it?
Price rejection at market structure.
This means you want the price to come into Support and Resistance and get rejected from it.
Here’s an example…
Price rejection at support on USD/JPY Daily timeframe:
- The price closes outside of the lower band of the Keltner Channels
- The price is at Support
- You get strong bullish price rejection (like Hammer, Bullish Engulfing Pattern, etc.)
- And vice versa for short setups
Does it make sense?
Then let’s move on…
Keltner Channel: How to identify different market conditions and improve your winning rate
I’m sure you agree the market is always changing — it can be in an uptrend, downtrend, or range.
On hindsight, it’s easy to identify the current market condition.
But in real-time, things are a lot more difficult, right?
Well, the good news is…
You’re about to learn a technique to help you identify market conditions in real-time so you can improve your winning rate.
Insert the Keltner Channels and 200-period Moving Average on your charts.
Now, you’ll see one of three things…
- If the entire Keltner Channel is above the 200MA, then the market is in an uptrend
- If the entire Keltner Channel is below the 200MA, then the market is in a downtrend
- If the 200MA is inside the Keltner Channel, then the market is in a range
Here’s an example of an uptrend on USD/TRY Daily timeframe:
If the market is in an uptrend, you look to buy.
If the market is in a downtrend, you look to sell.
If the market is in a range, you can “buy low and sell high” within the boundaries of the range.
Keltner Channel Squeeze: How to identify explosive breakout trades about to occur
Here’s something you might not know…
The volatility of the market moves in cycles, from a period of low volatility to high volatility and vice versa.
This means the best time to do it is when the volatility of the market is low.
You might be wondering…
“But how do I tell when the market’s volatility is low?”
There are different ways, but one approach is using the Keltner Channel.
- Let the price come near to Support and Resistance
- Wait for a Keltner Channel Squeeze (the price gets “trap” between the outer and middle channel line)
- Enter on the breakout
Here are a few examples…
Keltner Channel Squeeze on USD/CNH Daily timeframe:
During the Keltner Channel Squeeze, the outer channel line is “close to flat” to signal indecision and low market volatility.
If the outer channel line is steep, it’s probably a strong trend and not a Keltner Channel Squeeze.
Here’s an example on USD/TRY Daily Timeframe…
How to better time your entries in a trending market
Trending markets are a different beast.
You can’t wait for the price to re-test Support and Resistance because it may never come (especially in strong trends).
So what now?
That’s where Moving Average comes into play.
The Middle Channel Line of the Keltner Channels is actually a 20-period Moving Average.
So, if the price is consistently above (or below) it, it’s probably a strong trend and you can the 20MA to time your entry.
- If the market is in a strong trend, then wait for a pullback towards the 20MA
- If there’s a pullback towards 20MA, then wait for a reversal candlestick patterns (like Hammer, Bullish Engulfing pattern, etc.) to signal an entry trigger
Here’s an example on XAG/USD Daily timeframe…
So, here’s what you’ve learned today:
- The Keltner Channel is an Envelop-based indicator. It’s similar to Bollinger Band with an upper, middle, and lower Channel Line, but the way it’s calculated is different
- A price reversal is likely to occur when the price closes outside of the outer Channel Line and into key market structure (like Support and Resistance)
- If the price closes outside of the outer Channel Line, avoid trading in the same direction as it’s prone to a pullback (or reversal)
- A Keltner Channel Squeeze occurs when the price is contained between the 20MA and the Outer Channel Line — signaling the market is about to break out, soon
- You can use the Keltner Channel to time your entry in a strong trend — buying the breakout or trading the pullback
And there you have it!
A detailed guide on how to use the Keltner Channel like a pro.
Now, here’s what I’d like to know…
Do you use Keltner Channel in your trading? Why or why not?
Leave a comment below and share your thoughts with me.