How to use Keltner Channel

Trade the Keltner Channel with eToro or FOREX.com for quick trade executions.

If you want to improve your trading strategy, consider using the Keltner Channel. It's a reliable and versatile indicator that can help you identify trends, breakouts, reversals and volatility in the forex market. 

This article will explain the Keltner Channel, how it works, how to calculate it and how to use it in your trading. It also compares it to another popular indicator — Bollinger Bands — and guides you on finding the best forex brokers that offer the Keltner Channel indicator on their platforms.

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What is the Keltner Channel?

The Keltner Channel is a technical tool for analyzing the movement of security prices, created by Chester Keltner in the 1960s. It includes three lines — a middle line that shows the price's exponential moving average (EMA) and two outer lines based on the average true range (ATR) of the price. The ATR measures volatility by considering each period's high, low and close. Typically, the outer lines are set at a multiple of the ATR above and below the middle line. This versatile tool can be used for any market and timeframe.

Understanding the Keltner Channel

The Keltner Channel can provide useful information about the price behavior of a currency pair. Here are some of the main concepts to understand.

Keltner Channel Methods

The Keltner Channel can be calculated and displayed differently depending on the settings a trader uses on their platform. The most common method is to use a 20-period EMA as the middle line and a 10-period ATR as the basis for the outer lines. The exterior lines are then set at 2 times the ATR above and below the center line. However, some traders may use different EMA, ATR and multiplier values depending on their preferences and trading style. The key is to find the settings that best suit your market and timeframe.

Calculating Keltner Channel

To calculate the Keltner Channel, you need to follow these steps.

• Calculate the EMA of the price for a given period (e.g., 20). This EMA forms the middle line of the channel.
• Calculate the ATR of the price for the specified period. The ATR is a measure of volatility that will determine the width of the channel.
• Multiply the ATR by a factor (typically 2). This is how far you will extend the outer lines from the middle line.
• Add the result of step 3 to the EMA to get the upper line of the channel.
• Subtract the result of step 3 from the EMA to get the lower channel line.

Limitations of Keltner Channel

The Keltner Channel is not a perfect indicator and has some limitations that traders should be aware of. 

• May not capture all price movements, especially when there are sudden spikes or gaps in the market. This may lead to false signals or missed opportunities.
• Lags behind the price action, especially when using longer periods for the EMA and ATR, possibly resulting in late entries or exits.
• May generate too many unreliable and unprofitable signals in sideways or choppy markets.
• May not be suitable for all trading styles or strategies, as it may need frequent adjustments or fine-tuning depending on the trader's preference and the market conditions.

How to Trade Forex Using the Keltner Channel Indicator

Here are some of the most common ways to trade forex using this indicator.

Trend Following

You can trade in the direction of the channel slope, which indicates the trend direction. For example, if the channel is sloping up, you can look for buying opportunities near the lower or middle band. If it's sloping down, you can look for selling opportunities near the upper or middle band.

Breakout Trading

You can trade when the price breaks out of the channel boundaries, which indicates a continuation or reversal of the trend. For instance, if the price breaks above the upper band in an uptrend, you can buy and anticipate a continuation of the trend. Suppose the price breaks below the lower band in a downtrend; you can sell and expect the price to keep dropping.

Range Trading

You can trade when the price oscillates between the upper and lower bands, which indicates a ranging market. For example, you can buy near the lower band and sell near the upper band or vice versa.

Keltner Channel vs. Bollinger Bands

Keltner Channel and Bollinger Bands are both volatility-based indicators that create a channel around the price movements of an asset. However, they differ in how they are calculated and how they can be used for trading.

Calculation

The Keltner Channel uses the ATR to determine the channel width, while Bollinger Bands uses the standard deviation (SD) of the price. ATR is a measure of the average range of price fluctuations over some time, while SD is a measure of how much the price deviates from its mean. ATR is more consistent and less affected by outliers than SD, which means the Keltner Channel is smoother and less prone to sudden spikes than Bollinger Bands.

Sensitivity

The Keltner Channel is less sensitive to price changes than Bollinger Bands, producing fewer but more reliable signals. Bollinger Bands are more sensitive to price changes than the Keltner Channel, generating more but less reliable signals. A Keltner Channel is better for identifying trends and breakouts, while Bollinger Bands are better for spotting reversals and volatility.

Trading Methods

The Keltner Channel and Bollinger Bands can be used for similar trading methods, such as trend following, breakout and range trading. However, some traders use a combination of both indicators to enhance their analysis and decision-making. For instance, the Keltner Channel helps identify the trend direction, while Bollinger Bands are useful for determining entry and exit points. Traders may also use the squeeze phenomenon, which indicates a period of low volatility and potential for a breakout when Bollinger Bands move inside a Keltner Channel.

Compare Forex Brokers

To use the Keltner Channel indicator for forex trading, choose a reputable broker that offers this feature. Look for factors like regulation, fees, execution speed, customer service and educational resources. To help you decide, Benzinga has prepared a comparison table of some of the best forex brokers that offer the Keltner Channel indicator.

Keltner Channel: A Powerful Alternative to Bollinger Bands

The Keltner Channel indicator can help identify trends, breakouts, reversals and volatility. To become proficient in using this tool, it's recommended to experiment with various settings and combine them with other indicators. Using stop-loss orders, testing your strategy on a demo account and keeping a trading journal can help improve your trading strategy and take it to the next level. 

Frequently Asked Questions