A simple and reliable strategy is a dream of every trader. A trading strategy is a systematic methodology used for buying and selling in the securities markets. It is based on predefined rules and criteria used when making trading decisions. A trading strategy may simple or complex and involve considerations such as investment style. Traders apply many strategies for fast trading dealing with signals of different quality and using the Martingale system.
The Keltner Channel breakout strategy attempts to capture big moves that the trend-pullback strategy may miss. It is based on two popular indicators. It is easy to use. It works well on lower time frames, and it avoids unnecessary risks.
How to set up Keltner Channels
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To trade with Keltner Channels strategy, you will need:
- Asset – EUR / USD;
- Chart – Japanese candlesticks;
- Timeframe – М5;
- Indicators – Keltner Channels and ADX.
Select Keltner Channels and ADX indicators from the drop-down list in your trading terminal.
First, you should set up Channels. It is a default indicator.
As you know, the trading market is volatile, therefore, to avoid noise and buy a contract on a strong trend, you need to add an ADX advisor with parameter 14 to the Keltner Channels.
For Keltner Channel you need to change the parameters 10, 10, 1 to 20, 20, 2. It will make the indicator less sensitive, which is important in trading on lower timeframes.
How to trade a strategy based on Keltner Channels
The Keltner Channel is a bit like Bollinger Bands. You see a equidistant channel, split in half by MA. Logically, the trading strategies are similar too but Keltner Channels are considered more accurate than the Bollinger Channel.
The main rule here is that trading follows the trend. If the market is flat, do not buy contracts. The general strategy is to buy if the price breaks above the upper band or sell short if the price drops below the lower band in the first 30 minutes after the market opens.
The middle band is used as the exit. There is no profit target for this trade. Just exit the trade whenever the middle band is touched, whether the trade is a loser or a winner.
Since the market is typically volatile right after the open, you may get one signal that results in a loss or small profit, immediately followed by another signal. Trade the second signal as well. Take only two trade signals for this strategy in the first 30 minutes. If a big move doesn’t occur on the first two channel breakouts, then it probably isn’t going to happen.
It is easy to determine a trend with the Keltner Channel: the candles are inside the channel and are in a certain direction.
Here are some expert recommendations:
- CALL option is purchased when the candlestick breaks the upper channel during the upward movement, and the ADX is above the 25th level, confirming that the movement is strong.
- PUT option should be done if the candlestick breaks the lower channel in a downtrend, and ADX is similarly above level 25.
The bottom line is that the breakout of the channel in the direction of the trend indicates the strengthening of the latter. In turn, the main ADX line, located above the 25, confirms the signal.
You should set the expiration time at 10 minutes.
It is not recommended to use Keltner channels strategy during the release of important news. Attempting to use this strategy on an asset that doesn’t have sharp and volatile moves in the morning will result in many losing trades because the price is unlikely to keep running after the breakout and will likely reverse instead.