In this review, we will look at the principles of trading with the Keltner Channel indicator. This indicator shows on the chart the price channel that we will use for the intraday strategy.
What is the Keltner Canal based on?
Keltner Channel Is a popular trend indicator that can be used to assess the current trend and find trading signals. This indicator was developed by a trader Chester W. Keltner in the 1960s, and later (in the 1980s) a modification of this indicator was used in its trading Linda Bradford Raschke…
The Keltner Channel indicator uses a combination of daily average volatility (ATR indicator) and Moving Average (SMA or EMA). The indicator consists of three lines: upper, lower and middle. These lines move in place with the quotes, creating a dynamic price channel. The principle of the Keltner Channel is similar to other channel indicators: Envelopes or Bollinger Bands.
On the price chart, the movement of quotes in the Keltner Channel is as follows:
- When an asset is in an uptrend, quotes regularly reach and go beyond the upper line of the indicator. Most of the time, the price is above the lower line and periodically drops to the middle line of the channel.
- When a financial instrument moves in a downtrend, quotes regularly reach and cross the lower line of the price channel. Most of the time, the price is below the upper line and periodically corrects to the middle line of the indicator.
Installing and configuring the indicator
The Keltner Channel is not a standard indicator, so to use it, you need to download the indicator file and install it in your terminal. You can download the Keltner Channel indicator for MetaTrader 4 using the link at the end of this article.
To install the Keltner Channel in the MetaTrader 4 trading terminal, copy the indicator file to the “Indicators” folder. To do this, through the main menu of the terminal, go to the File / Open data directory / MQL 4 / Indicators section – copy the indicator file into this folder, and then restart the terminal.
As a result, the Keltner Channel will appear in the list of custom indicators, and it can be installed on the chart of the desired instrument through the main menu: Insert / Indicators / Custom / Keltner Channel. Or you can simply drag the indicator onto the chart with the left mouse button from the “Navigator” window.
The indicator is calculated as follows:
- Middle Line = SMA – Simple Moving Average for a given period.
- Upper Line = (SMA + ATR) – Moving Average, shifted upward by the value of the average volatility.
- The lower line of the channel (Lower Line) = (SMA – ATR) – Moving average, shifted down by the value of the average volatility.
In the indicator settings, you can change:
- Period – indicator period (the number of candlesticks on the chart by which the channel boundaries are calculated), select 20 for intraday trading.
In this example, we are looking at the basic version of the Keltner Channel. On the Internet, you can find various modifications of this indicator with advanced settings: increasing ATR coefficient, variable parameters of the Moving Average, and so on. If you are interested in this indicator, you can experiment with different versions and settings.
Intraday trading on the Keltner Channel
For intraday trading using the Keltner Channel, lower timeframes are used, from M1 to H1. Consider two main trading signals: a rebound from the middle line of the channel and a breakout of its borders.
Rebound from the midline
Trading the rebound from the Keltner Channel centerline is to enter buy / sell positions during an up / downtrend when the price corrects towards the midline. Trading is carried out only in the direction of the current trend: an upward bounce in an uptrend and a downward bounce in a downtrend.
- The signal appears after the price bounces up from the middle line during an uptrend.
- The price, after a correction to the middle line, should form a local minimum and turn up.
- After an upward reversal, a buy position is opened, the Stop is set beyond the formed minimum.
- Profit can be fixed when the double Stop size is reached or when a downward reversal is formed.
- A signal is generated when the price bounces down from the midline during a downtrend.
- Having reached the middle line, the price should form a local maximum and turn down.
- After a rebound from the middle line, you can open a sell position, set a Stop beyond the local maximum.
- The profit can be closed when the double Stop size is reached or when an upward reversal appears.
Breaking the channel boundaries
Trading on the breakout of the Keltner Channel boundaries can be used when an upward or downward price movement begins in the market. There is a directional price impulse, as a result of which quotes go out of the sideways range and out of the channel boundaries.
- A signal appears when the price shows a sharp upward movement and goes above the boundaries of the sideways range and the upper line of the price channel.
- After the candle closes above the upper line of the indicator, a buy position is opened, Stop is placed beyond the local minimum.
- Profit can be fixed when the Stop value triples, or when a strong resistance level is reached, or if the price reverses and crosses the lower channel line.
- A signal is generated after the start of an upward movement, when the price exits the sideways range and crosses the lower line of the indicator.
- The sell is opened after the candle closes below the lower line of the price channel, the Stop is set beyond the nearest maximum.
- The profit is fixed when the triple Stop value is reached, or when a significant support level is reached, or if an upward reversal has begun and the price crossed the upper channel line.
The Keltner Channel indicator displays a price channel on the chart, which is used to search for trading signals. To improve the efficiency of trading signals, you can use the Keltner Channel in conjunction with other indicators, price patterns and Price Action patterns.
You can learn more about the author’s trading methodology for this indicator in the book “How To Make Money in Commodities” by Chester Keltner.