7/8/2019 The Complete Guide to Keltner Channel Indicator

The Complete Guide to Keltner Channel

Indicator

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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.

But first…

What is a Keltner Channel and how does it work?

The Keltner Channel is an Envelop-based indicator (others include Bollinger
Bands, Donchian Channels, etc.).

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…

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Pro Tip:

If you use TradingView, you can find the Keltner Channel under the “Indicators” tab…

Keltner Channel vs Bollinger Bands, what’s the difference?

The difference is the way Channel Lines are calculated.

Keltner Channel uses Average True Range and Bollinger Bands uses Standard
Deviation.

And if you compare the two, you’ll realize Keltner Channel is “smoother” compared to
Bollinger Bands.

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Next…

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 Keltner Channel.

Why?

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:

So now the question is:

How do you use the Keltner Channel?

Well, that’s what I’ll cover next.

Read on…

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How to use Keltner Channel to “predict” market

turning points
Here’s something you might not know…

Price reversals usually occur when there’s an extreme move into market structure
(like Support or Resistance).

You’re probably thinking:

“But how do I identify an extreme move?”

That’s where Keltner Channel 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.

An example…

Closed outside the Keltner Channel at USD/JPY Daily timeframe:

Now before you think…

“Oh, the price has closed outside of the Lower Channel Line. Time to buy!”

Not so fast, my young padawan.

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Recall:

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:

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Now if that’s a lot to swallow, then here’s a quick recap…

1. The price closes outside of the Lower Keltner Channel Line

2. The price is at Support
3. You get strong bullish price rejection (like Hammer, Bullish Engulfing Pattern, etc.)
4. And vice versa for short setups

Does it make sense?

Great!

Then let’s move on…

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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.

Here’s how…

Insert the Keltner Channel 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:

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Here’s an example of a range market on NZD/JPY Daily timeframe:

So how do you make use of this information?

Simple.

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.

Next…

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