He initially used day Keltner moving average bands to calculate the middle band of the Keltner channel instead of the modern variety that uses a period exponential moving average in the Keltner channel settings. In fact, the modern variety of Keltner channel, found as a built-in technical indicator in popular charting software, is the brainchild of world-renowned commodities and futures trader , Linda Bradford Raschke, who is the Founder and President of money management firm LBRGroup, Inc.

The Keltner channel calculation could be easily summarized with the following formula:. You see, the current version of the Keltner channel is comprised by combining two separate technical indicators. The first component of the Keltner channel is a period exponential moving average, which acts as the middle band.

The second element of the Keltner channel is a multiplied value of the Average True Range ATR indicator , which is commonly set at a value of 2. This means that the upper and lower channels are always at a 2x ATR distance from the period Exponential Moving Average middle band. Since the Exponential Moving Average reacts faster to the changing directional movement of the price, the Keltner channel can provide an accurate overall direction of the trend by smoothing the price action.

As you can imagine, the more volatile a Forex pair is, the wider the upper and lower channels will appear from the middle band.

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However, depending on the charting software and availability of indicator settings, you can also change the ATR look back period in order to tweak the Keltner channel indicator further, since the price action and volatility of each Forex pair is unique. Hence, you can make minor tweaks in its settings to fit a particular currency pair. However, most beginning and novice traders should stick to using the default Keltner channel settings until they have gained sufficient experience trading with Keltner channels.

Besides the Keltner channel, several other popular technical indicators fit the description of envelop based indicators. For example, the Bollinger Band indicator is another popular example in this family of trading indicators. For instance, while both Bollinger Bands and Keltner channels draw channels around the price range, the main difference between these two indicators is how the upper and lower, as well as the middle channel values are calculated.

As demonstrated in Figure 1, the Bollinger Band indicator uses a period simple moving average for the middle band and draws its channels or upper and lower bands at a distance of 2 standard deviations from the middle band. On the other hand, the middle band of Keltner channel calculation is based on a period exponential moving average, where the upper and lower channels are drawn at an equal distance from an Average True Range value multiplier. Unlike the Average True Range used in the Keltner channel, the standard deviation value of the Bollinger Band does not represent an average, and it creates more sharp edges on the chart.

Hence, some Forex traders prefer the Keltner channel over the Bollinger Band, as it draws smoother channels that can sometimes offer higher quality signals. When the upper and lower channels of the envelop family of indicators move in an upward direction where the price continuously trades near the upper channel, Forex traders interpret this signal as an upward trending market condition.

By contrast, when the channels are moving in a downward direction and the price continuously trades near the lower channel, the market is considered to be a downward trending market condition. However, when the Keltner channels remain flat, and the price starts bouncing between the upper and lower channels without showing any directional tendency, Forex traders consider such market condition as a consolidating or range bound market.

Currency price movements can typically stall and even tend to range for a brief period of time during uptrends and downtrends. During minor pullbacks that resume the prevailing trend, envelop based technical indicators help Forex traders recognize entry opportunities to add new or additional positions in the direction of the underlying trend.

Many times, you can quickly identify if the market is in an uptrend or downtrend, or consolidating within a range just by taking a look at the Keltner channels. Then depending on the underlying conditions, you would incorporate a Keltner channel trading strategy best suited for the particular market situation. As discussed earlier, the upper and lower Keltner channels are always plotted at an equal distance from the period Exponential Moving Average. As these channel extremes represent a multiplier of the average volatility of the currency pair, when the price goes above or below the Keltner channels, it signifies that the market is trading outside of the average or normal price range.

However, if the Keltner channels remain flat and the price trades within the upper and lower bands of the Keltner channels without penetrating above or below, it signifies that the market is range bound. One of the best aspects of the Keltner channel is that it not only provides traders with an overall technical market outlook about the on-going trend, but it can also signal a potential trend reversal when the price reverses and crosses the opposite channel.

Using a Keltner channel strategy, you can generate actionable entry and exit trade signals that can offer a solid reward to risk ratio. 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. 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.

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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 The multipliers for weighting the EMA are constants, meaning that they are fixed to their individual time frames. For example, a day EMA has a weighting of This is achieved by the weighting formula, which is:. To calculate the current EMA with the weighting multiplier in mind, you would do the following:.

Taking a close price of 1.

Simple Keltner Channel Trading Strategies Explained

You would repeat this process over the time frame that you want your EMA to represent, with many traders choosing a day EMA. If you chose a day EMA, once you have calculated the day EMA for your Keltner channel, you can use it to calculate the upper and lower bands. The upper band is usually a day EMA plus double the average true range; the lower band is usually a day EMA minus double the average true range. To calculate the average true range, you would first need to calculate the true range, which is the largest number of the following:.

For a specific time frame the first true range is simply the current high minus the current low, and the first average true range is an average of all the previous true ranges in the time frame — 20 days for example.

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Learn more about the average true range indicator. The Keltner channel tells traders when a trend is likely to reverse or accelerate. As the graph below shows, the trend reversal is labelled where the price of the asset breaks through and closes above the upper band of the Keltner channel. Traders can use areas at which the price of an asset has closed above or below the two bands of the Keltner channel as possible areas of support or resistance.

These areas can help to determine whether the price of an asset will continue on its current path or reverse against the prevailing trend.

Keltner Channel Trading Strategy

You should use the Keltner channel alongside other technical indicators such as the relative strength index RSI , other moving averages or Bollinger bands. This is to ensure that a trend reversal or continuation is confirmed before you open or close any positions based on findings from the Keltner channel indicator. You can use the Keltner channel in your trading to show areas at which you might want to open buy or sell positions. Generally, traders will open a buy position as the price of an asset starts to rise toward the lower band of the channel after falling through it. MetaTrader 4 MT4 is a popular platform for automated and algorithmic trading.

MT4 is primarily used by forex traders, and because FX is a very volatile market, the Keltner channel is one of the most used indicators on MT4. Just like a range of other platforms, MT4 has the functionality to automatically apply Keltner channels to your charts while using the platform.

Aside from the Keltner channel, MT4 comes with a host of indicators and add-ons , some of which you get for free when you download MT4 from IG. While the Keltner channel has similarities to Bollinger bands , there are also some differences such as how the two indicators are calculated. The Keltner channel uses an average true range set either side of an exponential moving average, while Bollinger bands use a standard deviation set either side of a simple moving average. Because Keltner channels are based on the average true range, they are smoother in appearance compared to other indicators, which means that they can filter out smaller price movements to help traders identify the prevailing trend.

The exponential moving average which the Keltner channel is based on also tends to react quicker to market movements as opposed to other forms of moving average. There are several things to bear in mind before trading with Keltner channels.

Simple Keltner Channel Trading Strategies Explained - Forex Training Group

For example, Keltner channels cannot give definitive indications of future price levels; instead working from historical price action to show potential trend reversals, accelerations or continuations. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information.

Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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