irst described by Chester Keltner in 1960, Kelthen Channels are very similar to Bollinger (Bollinger Bands) and represent a volatility indicator.
As it is in two rows along the lower and upper limits of the trading range, in the middle of which passes a moving average with a period of 20 days (MA 20).
In 1980, Linda Bradford Raschke developed new Keltner Channels by exchanging the simple moving average with an exponential one and changing the outer lines to be based on Average True Range, instead of standard deviations (SD). This significantly increases its efficiency.
The Average True Range is a volatility indicator itself, which makes the Keltner Channels to contract and expand with volatility, as well. However, they are not as volatile as the Bollinger Bands.
Keltner Channels serve as a guide for a few things, that’s why the experts think of it as the most useful one for evaluating the entire market situation. What does Keltner Channels do?
- Set trade entries and exits.
- They help you to determine the overbought and oversold levels relative to a moving average, especially when it comes to a flat trend.
- Provide clues for new trends.
It resembles an ascending or descending channel, except it is automatically adjusted to recent market volatility.
See how it looks laid on a chart:
What are the differences between Keltner channel and Bollinger bands?
The emergence of this problem is due to some similarities in the emergence of these indicators and the general principles of construction.
There are several differences.
- The Keltner channel can be called smoother because the ATR is more stable than the standard deviation. As a result of using such data, the line is smooth and free of many noises present in Bollinger Bands.
- The difference is in the characteristics of use. The Keltner channel indicator is based on ATR, which allows you to get a corridor with one width anywhere. This feature makes it easy to use any trading strategy.
How to Trade Forex Using Keltner Channels
Keltner Channels show the area where a currency pair normally hangs out.
The upper channel is typically referred as dynamic resistance while the lower channel is used as a dynamic support.
How Can We Use Keltner Channels as Dynamic Support and Resistance Levels?
The settings, which most traders use, are 2 x ATR (10) for the upper and lower lines and EMA (20), which is the middle line.
This middle line has an important role, because it tends to act as a pullback level during ongoing trends.
If there is an UPTREND, the price action tends to be limited in the UPPER HALF of the channel, then the middle line acts as support and the top line as resistance.
In case of a DOWNTREND, you can find the price action usually around the BOTTOM HALF of the channel, finding resistance at the middle line and support at the bottom line.
When there is a RANGING MARKET, price usually goes back and forth between the upper and lower lines.
How to Trade Breakouts Using Keltner Channels?
Keltner himself believed that breaking out the channel is a sure sign of a strong trend. For this reason, crossing the line of support and resistance requires special attention.
Don’t forget to consider the direction of trade. Open an order in the direction of penetration.
If the candle or stick has broken the upper limit of the channel, it means that it will continue going up, so a purchase transaction (buy order) must be opened.
Closing a candle or bar outside the lower boundary of the channel is a sell signal.
Note that trading with this trend is less risky, therefore it is suitable for conservative traders.
The difficulty comes with identifying the emergence of a new trend. This is due to the appearance of false signals. To eliminate such misleadings, you need to use additional technical analysis tools, as always.