The Keltner Aqueduct is a volatility based trading indicator that uses two bands and the average true range to set the aqueduct distance below and above an exponential moving average, mostly 20 flow EMA.
You use the Keltner Channel to determine when a market place has stretched besides far from the moving average – the average price of the marketplace of N number of days.
Using Keltner Channels equally part of a trading strategy
takes reward of a volatility based trading indicator
which allows us to trade markets that are showing good price movement.
Trading indicators are derivative of toll pregnant that the results that y’all see via a trading indicator volition come via a calculation using the price you run across on your chart. This is a long winded mode of saying that
all trading indicators, including the Keltner Channel, are going to lag actual price movement.
- Price get-go
- Indicator second
Channels tin brand a for a good trading strategy because they can not only bear witness what “normal price movement” should be but likewise when a price issue happens outside the normal behavior of cost.
How Practice Keltner Channels Work?
Keltner channels piece of work past combining the average true range of an instrument and and so plots the multiple of the ATR above and below the exponential moving boilerplate by using bands.
The settings are based on several inputs that y’all can change depending on your charting platform:
- Moving average length (will determine lag fourth dimension of channel)
- Average true range (ATR)
- Band multiplier (uses ATR reading)
- Moving average type (EMA, SMA)
- ATR type (EMA, SMA)
The Keltner Channel is calculated as follows:
- Middle Line: 20-day exponential moving boilerplate
- Upper Channel Line: 20-24-hour interval EMA + (ATR X N multipler)
- Lower Channel Line: 20-solar day EMA – (ATR 10 N multipler)
The band multiplier is a very important number equally information technology volition determine how tight the outer and lower bands are to cost.
Equally an example of band distance:
- .8 X ATR volition have bands closer to toll motion which can render the indicator useless every bit price volition routinely alienation the upper and lower bands
- 2.v X ATR will take bands further from normal price movement and the channels will only have price breach upper or lower channel line when a significant price motion happens
If the bands are tight, you lot may get a lot of excursions to the bands and across. This may be suitable for those scalping or day trading with the Keltner channel just not suitable for those looking for longer term plays in their musical instrument.
How To Merchandise With Keltner Channels
It is the buying and selling by humans (and computers although the trading programs are programmed by humans) that will move toll. As humans, we are susceptible to emotions and beliefs and emotions are even more vulnerable when money is on the line.
Channel trading, and this includes Bollinger bands and moving average envelopes, are theoretically designed to surround the general toll action of the charted instrument. You can utilise channels to make up one’s mind when a market place is oversold or overbought when yous consider the price human relationship to each side of the trading aqueduct.
The cardinal words are “general price action” considering anything seen exterior of the general movement of price can be considered an extreme motility.
Ane fashion to envision this full general movement is consider that the price is travelling without an extreme bullish or surly bias. While at that place may be an overall bias in one direction, at that place is nothing out of the ordinary with the movement of price.
There are times when a “that’s different” moment takes place and the price will make a move in one direction or the other. Yous will run across cost pause either the upper or lower bands and that indicates that
something has changed
in the market.
This is the time when you desire to be on warning for potential trading opportunities as it is clear that volatility has increased. Y’all use the word potential because you lot don’t desire to have a trade based on 1 indicator solitary.
Keltner Bands & Moving Average Tin can Be Trade Locations
At that place are other things to consider but we tin can use the Keltner channel bands that surround toll and the channels moving boilerplate every bit an alert for possible opportunity.
The bands practice not act as a physical bulwark to price just equally moving averages practise not magically back up cost.
They are a
measure of volatility
in the case of the bands and consensus when referring to moving averages. Both price volatility when price is showing stiff motility and when toll is in residuum are places for potential trading opportunities.
The average true range calculation of the Keltner shows us when at that place is an expansion in the price range of price which indicates some type of stimulus is hitting the market to move price.
Keeping that truth in mind, you tin can see how important information technology is non to just “push the buttons” because the price has found itself in those locations.
Moving Average = Understanding of Price
The Keltner channel is plotted with two outer bands and through the middle is a 20 period exponential moving average (EMA).
Using the moving average, the eye line, as an expanse of general understanding in price, nosotros can run into when price moves away from it that one side is favored over the other. The further toll moves away, the more than we await a snap back in the price.
The moving average can as well
human activity as the landing zone
after the price makes the snap back and when I say zone, I mean we don’t expect price to land straight on the average. That is why nosotros don’t only execute trades when price is supporting or resisting in the area of a moving average.
Keltner Channel VS Bollinger Bands
The Bollinger band is calculated using a standard divergence while the Keltner uses ATR (average true range).
The Keltner Aqueduct uses an EMA as opposed to the Bollinger Band which uses a SMA. There is a slight difference between an exponential moving average and simple moving average in terms of sensitivity every bit the EMA will react quicker to whatsoever major motility in price.
You can visually see how Bollinger bands reacts differently with sudden price shocks.
That “balloon” event happens because Bollinger Bands are based on the standard deviation. When price moves out of congestion range as this example shows, the bands stretch far from price. The Keltner Aqueduct on the other hand is smoother which makes it easier to spot trends in the market place.
The “airship” effect of the Bollinger Band combined with the smoothness of the Keltner can give us another trading indicator.
Bollinger Band Clasp
Some traders utilize the Bollinger bands and the Keltner aqueduct together to show a Bollinger Ring Clasp. When the Bollinger is inside the Keltner, the squeeze is on. This indicates a trading range is occurring. As a trade setup, the motion of the bands outside of the channel is the trigger. This would indicate that the cost is potentially about to go along a run equally price breaks from the trading range.
Whether you are going to use the Keltner channel or Bollinger Bands for this trading organization, is not the point. You can employ either because information technology is the concept we are looking at.
Cost Channel Trading Plan
The original Keltner used a 10 period for the moving average but information technology caused traders to be whipsawed around far too much. Over fourth dimension, the popular setting became a twenty menstruum EMA, a twenty period average true range and a 2.25 multiple. These settings were brought to utilise by Linda Bradford Raschke.
You can of course test various settings merely in the stop, nosotros are simply looking for price engaging with either of sides of the channel.
How To Utilise Keltner Channels to Trade Pullbacks
Trading pullbacks is best done in a marketplace that has exhibited a potent push in a direction in a trending market. This is based on swing analysis where you want to see conviction in a market swing that indicates some other move in the aforementioned direction.
Using the Keltner aqueduct, we can apply price traveling exterior the bands equally an indication in that location was confidence in the swing.
If we are trading in an downtrend, you want to see cost travel to the bottom channel and plot outside of the channel. Even a shadow plot is sufficient if y’all are a more than aggressive trader.
An excursion outside of the channel indicates an extreme from what was a considered normal cost activity.
When price is at the aqueduct, that is an alert to await for a pullback in the price to an area around the 20 catamenia EMA.
This chart shows a downwardly trending market
in play.
Highlighted by the orange color, you tin meet that price has traveled outside of the channel. This is the first sign that we may have a trade if the pullback fits other criteria. In certain charting packages, you can gear up an warning that will indicate you lot if/when toll has hit the aqueduct and some of you may find that useful.
Not all excursions equaled a pullback into the zone around the moving average and as you can see that at times, price traveled forth the channel. That outcome volition be covered in a later trading tips segment.
We now have iii definite pullbacks that met our criteria of:
- Excursion outside of Keltner Channel
- Pullback to area of 20 EMA. A price cross of the average does not invalidate the trade setup.
- Obvious trending market as shown by the gradient of the channel and moving average.
Confluence and Trade Triggers
Our potential merchandise is now being setup but we all the same don’t just enter when price touches the 20 EMA. Nosotros would like to see price pulling back not only to the mid-line but also to a price structure
or exhibiting a topping pattern. This is called confluence and tin can really increase the probability of your trade getting some traction.
We demand a trigger to go into the merchandise and in that location are many tools that y’all can utilize. Momentum indicators are a popular method likewise as the very basic tendency line.
This chart is a factor 4 less than the previous nautical chart. By using a smaller fourth dimension frame to get into the trade, y’all may be able to get a better position sizing every bit you position yourself higher in the curve to the downside in this example.
The black dotted lines on this chart are boxing off structures of possible resistance that coincide with the pullback to the mid-line. Allow’s call these potential resistance zones because when price is pulling back, we don’t know with 100% certainty if price will stop at these areas simply information technology potentially could.
These potential zones of trading opportunity that includes the structure are from the trading chart and I encourage you non to use the trigger nautical chart to detect the structure.
The trigger nautical chart is only used for exactly what the name implies.
Before continuing, the area marked three may have some questions. It is a sloppy complex pullback because the 2nd leg did pierce the lesser of the offset before reversing from what may be considered a double bottom.
Where this gets interesting is the 2nd leg matches in altitude the first leg of the move.
This is called symmetry and many traders will utilize this as a stand alone trading organisation. Price also exhibits a topping pattern, a double top and you lot tin can run across from this chart that a confluence of factors were in play when price broke solidly to the downside.
I am using standard trend-lines to testify the counter-tendency movement in cost which brings us to our setup zone. You may use a standard break of the trend-line for your merchandise entry.
End placements could go either in a higher place the plow or to a higher place the zone that has acted equally resistance.
How To Set Profit Targets When Using Keltner Channels
We are going to use the setup nautical chart for targets and like trade entries, you take a few options.
Some traders like to target opposing structures while others would like a more objective means to notice turn a profit targets.
I’ve spoken about Fibonacci many times over the years and have shown examples from my ain trading. Fibonacci was my original method of trading when I start started and have since refined things since the early days.
The fact that we are trading pullbacks makes information technology easy to detect our targets with Fibonacci in a way that is completely objective. Nosotros are going to have the move into the extreme of our pullback and project forrard in fourth dimension to a potential price target.
The diagram on the chart shows that “A” is the anchor indicate and you pull the Fibonacci retracement tool to “B”. You project your targets at “C.”
Here are the numbers that I personally employ and will employ for this example. Notation that 200 is omitted but I use it for targeting after a range.
- I used the bottom of the structure range for the entry price.
- I use .786 as the stop cost in one case toll breached the low of the swing leading to the farthermost
- Whatever target price hitting just prior to breaching the .786, it was a full go out cost.
You can see the total pips for each merchandise in green for a combined total of 245 pips (Forex example) earlier spread costs. These targets are shown on the trigger nautical chart for item.
Use Keltner Channel Bands For Targets
If yous are trading pullbacks close to the moving average or at the opposing channel line, consider taking profits or fractional profits at the lower or upper channel depending on your trade direction.
In the graphic above, shorting around the moving average and using the lower ring to adjust your stop or scale out partial profits is a sound trading approach. Yous will be using the volatility of the market to decide your price points as opposed to a subjective measure out of price movement.
Complete Trading Plan
This Keltner channel trading system is not complicated but don’t exist misled by the simplicity. Yous yet have to put in the work in determining the overall trend direction, when counter tendency trading is appropriate, extent of circuit plus the very important business relationship management and take chances profiles.
That’due south but to name a few variables.
At that place are also other trading opportunities that Keltner channel trading may provide and I will cover some of those in a later mail.
A lot of work goes into designing a full trading programme including back testing and frontwards testing. Contact our trading coaches and run across how Netpicks can assist y’all on the road to successful trading.
Source: https://www.netpicks.com/keltner-channel-trading-strategy/
