Keltner Channels are volatility-based envelopes set above and below an exponential moving average. This indicator is similar to Bollinger Bands, which use the standard deviation to set the bands. Keltner Channels are a trend following indicator used to identify reversals with channel breakouts and channel direction. Channels can also be used to identify overbought and oversold levels when the trend is flat.
You can find Keltner Channels in the Pocket Option terminal among the standard tools. Thus, to take advantage of its signals, you just need to install it on the workspace.
History of Keltner Channel Trend Indicator
The Keltner Channel first appeared in 1960 in the Chester Keltner’s book “How to make money in commodity markets”. Initially, this was the “10-day moving average trading rule”. The first version of the Keltner Channel was built around a ten-day simple moving average calculated at a typical price. To build the channel, a ten-day distance between the maximum and minimum points was used, that is, the difference between the maximum and minimum price for 10 days.
Later, in 1980, the well-known trader Linda Raschke introduced the modernized version of the Keltner Channel to the public, where the ATR indicator was already used to calculate the channel width. It is a modern version. which is a hybrid of the original source with the ATR indicator, appeared in 1980. In time, a renowned trader Robert Colby replaced the central simple moving average with an exponential one.
There are three steps to calculating Keltner Channels. First, select the length for the exponential moving average. Second, choose the time periods for the Average True Range (ATR). Third, choose the multiplier for the Average True Range.
Please, remember that the candles must be inside the indicator. If the graph is outside the channel, then you need to correctly configure the parameters.
To set the appropriate values for your asset and timeframe, click on the pencil next to the name of the instrument. A window with settings will open in front of you.
Recommended EMA setting is set at default.
Recommended period for the average market price is 20 candles.
Reaction to price changes depends on ATR period. By default, it is set at 10 bars. If you increase it, the indicator will lag more strongly (suitable for longer timeframes), and with a decrease, on the contrary, it will react faster (suitable for shorter timeframes).
The deviation can be set from 1 to 3. It depends on the volatility of the asset. The higher the volatility of the instrument, the greater the deviation should be.
How to trade with Keltner Channels?
Be attentive to trading signals generated by Keltner Channel indicator. Enter the trade on the breakout of one of the extreme lines.
- CALL when the candlestick breaks out of the lower channel.
- PUT when the candlestick breaks out of the top channel.
The expiration period must be at least the time of formation of three candles.
A channel upturn and break above the upper trend line can signal the start of an uptrend. A channel downturn and break below the lower trend line can signal the start a downtrend. Sometimes a strong trend does not take hold after a channel breakout and prices oscillate between the channel lines. Such trading ranges are marked by a relatively flat moving average. The channel boundaries can then be used to identify overbought and oversold levels for trading purposes.