The Keltner Channels indicator is a technical analysis tool used to identify trends and price fluctuations.
This indicator consists of a middle line (Basis Line), an upper line (Upper Band), and a lower line (Lower Band), which help reduce price noise.
Introduction to the Keltner Channels Indicator
The Keltner channels technical indicator combines the Exponential Moving Average (EMA) and the Average True Range (ATR) to create a channels consisting of three parts around the price.
This channels displays the movements of the chart within a specific framework. Components of the Keltner Channels Indicator:
- Middle Line (Basis Line): This line is the core of the indicator and shows the overall price trend based on the EMA 20;
- Upper Line (Upper Band): This line acts as a dynamic resistance level; if the price crosses this line, a bullish signal is generated;
- Lower Line (Lower Band): This line acts as a dynamic support level; a bearish signal is generated if the price crosses this line.
Advantages and Disadvantages of the Keltner Channels
To optimally use the Keltner channels technical indicator, it is essential to understand its advantages and disadvantages. Advantages and Disadvantages of the Keltner Channels:
Disadvantages | Advantages |
Poor Performance in Range-Bound and Low-Volatility Markets | Combines Trend Information (EMA) and Volatility (ATR) for Accurate Signals |
Requires Proper Parameter Adjustment | More Stable than Bollinger Bands in Volatile Conditions |
Does Not Provide Clear Signals for Overbought or Oversold Conditions | Capable of Identifying Strong Trends and Entry/Exit Points |
Slow Reaction to Sudden Price Changes | Reduces Price Noise Compared to Similar Indicators |
Applications of the Keltner Channels
The Keltner Channels Indicator uses the Exponential Moving Average (EMA) and the Average True Range (ATR) to identify trends, breakout signals, and entry points.
Using the Keltner Channels Technical Indicator to Identify Trends
One of the primary uses of the Keltner Channels is to identify the current price trend; this is determined by the price's interaction with the lines and movement within the channels.
- Uptrend: When the price moves between the Basis Band and the Upper Band, the middle line acts as a dynamic support in an uptrend;
- Downtrend: When the price moves between the Basis Band and the Lower Band, the middle line acts as a dynamic resistance in a downtrend;
- Range-bound Market: When the price fluctuates within the range, the middle line is often broken, while the upper and lower lines act as resistance and support.
Note: To make easy use of the Keltner Channels, you can use the TradingFinder indicator set.
Receiving Breakout Signals Using the Keltner Channels Technical Indicator
Depending on the market's bullish or bearish structure, the method of identifying breakouts using the Keltner Channel changes.
- Bullish Breakout: When the Upper Band is broken with increased volume and strong candles, a bullish breakout signal is generated;
- Bearish Breakout: When the Lower Band is broken with strong candles and increased market volume, a bearish breakout signal is generated.
Trading with the Keltner Channel
The Keltner channels technical indicator uses the concepts of Exponential Moving Average (EMA) and Average True Range (ATR) to identify entry points, exit points, and stop-loss levels.
Long Position Trading Using the Keltner Channels Technical Indicator
- Entry: Happens after the Basis Band or Upper Band is broken by a strong candle and increased market volume;
- Stop Loss: The stop-loss order is located below the Basis Band or Lower Band.
Exit: A break below the middle line is the first exit signal; approaching and testing the lower line is the next.
Short Position Trading Using the Keltner Channels Technical Indicator
- Entry: Occurs after the Basis Band or Lower Band is broken by a strong candle and increased market volume;
- Stop Loss: The stop-loss order is placed above the Basis Band or Upper Band.
Exit: A break above the middle line is the first exit signal; approaching and testing the upper line is the next.
Differences Between the Keltner Channels and Bollinger Bands
The Keltner Channels has many similarities with the Bollinger Bands; however, they differ in calculation methods, signaling, and trading applications. Comparison of the Keltner Channels and Bollinger Bands:
Parameter | Keltner Channels | Bollinger Bands |
Moving Average | Exponential Moving Average (EMA) | Simple Moving Average (SMA) |
Volatility Measure | Average True Range (ATR) | Standard Deviation |
Sensitivity to Market Volatility | Moderate | Highly Sensitive |
Performance in Range-bound Markets | Weak | Good |
Primary Application | Identifying trends and breakout points | Identifying volatility and overbought/oversold levels |
Conclusion
The Keltner Channels is a flexible tool in various short-term and long-term trade strategies.
Although this indicator performs well in identifying strong trends and breakout points, it does not provide very accurate signals in range-bound and low-volatility market conditions; to filter out false signals, you can combine them with volume indicators or oscillators.
