Among the simplest and most effective Forex tools, experts call the Keltner Channel. This channel received its name on behalf of its creator. The principle of operation of this trading instrument is based on the same principles as Bollinger Bands or moving average envelopes. Moreover, he has significant differences.
Indicator Description
The Keltner Channel is a trend indicator that was developed in 1960 by Charles Keltner and a little later described in the book “How to make money on commodities.”
According to the calculation scheme, the operation of the channel is similar to the operation of the Bollinger band indicator. However, in this case, not the standard deviation, but the average true range (referred to as ATR) is used as the basis.
Chart indicator
The Keltner Channel on the chart is represented by three lines that are located in close proximity to the price level. The main role is played by the center line, which is called the moving average. The other two are located above and below the average and are lines with a certain deviation specified in the settings.
This indicator is one of the standard ones, therefore it is present on many trading platforms. If the tool is missing, you can find it in the public domain and download. After that, the folder with the trend indicator is moved to the trading terminal.
Customization
To construct and calculate the Keltner channel in MT4, the following quantities will be required:
- EMA (moving average) - by default, the period is 20 days;
- upper line - it is calculated by the formula EMA + ATRˣ2;
- the bottom line is calculated in a similar way: EMA - ATRˣ2.
At the same time, the period of 10 is often set in the ATR settings.
You can use such a tool on different currency pairs and on all timeframes. To reduce the number of false signals, it may be necessary to adjust the settings depending on the selected timeframe.
To choose the right period, you should pay attention to the trading strategy. Standard settings are suitable for an intraday chart. However, you should not use a time frame of less than one hour.
Long-term traders should set a period longer than this.
Signals
The peculiarity of this trading instrument is its belonging to trend indicators. With it, an experienced trader will only need a couple of minutes to assess the general situation on the market.
- An upward channel indicates an upward price.
- The decreasing Keltner Channel corridor indicates a downward price.
- Lateral movement in a narrow corridor indicates a temporary absence of a trend. In such cases, the price fluctuates slightly between the upper and lower line of the channel.
This data can be used as the basis of several strategies. Each of them has its own requirements for opening and closing orders. There are several common signals.
- The breaking of the upper line of the channel indicates a sharp increase in market strength.
- When breaking through the lower border, we can talk about the weakening of the asset.
- A situation in which candles or bars are located outside the channel is a signal that the trend will soon change its direction.
It should be remembered: in addition to true signals, numerous false signals will appear on the chart. To minimize risks, you should not choose a short time frame. In addition, experienced traders are advised to wait for the confirmation of the signal.
Support and Resistance
The upper and lower border of the corridor act as support and resistance lines. In other words, when moving, the price periodically bounces from the bottom line and moves to the top, and vice versa. This feature has been successfully used by many traders. When a rebound from the upper boundary of the corridor opens a sell order. When bouncing from the bottom line, they make a purchase.
This strategy for the Keltner channel allows you to trade on any currency pair and on any timeframe. At the same time, a pronounced trend movement and a flat state are suitable for trading.
This type of trading is more suitable for an intraday chart. When using it, there is a certain risk if the order is opened against the trend.
Penetration strategy
Keltner himself believed that breaking through the corridor is a sure sign of the emergence of a strong trend. It is for this reason that crossing the line of support and resistance requires special attention.
It is important to consider the direction of trade. The order is opened in the direction of penetration.
- If a candle or bar breaks through the upper border of the corridor, then a buy deal should be opened.
- Closing a candle or bar outside the lower border of the corridor is a signal to sell.
It should be noted that trend trading is less risky, therefore it is suitable for conservative traders. The difficulty is that it is not easy to identify the emergence of a new trend. This is due to the appearance of false signals. To eliminate interference, some traders advise using additional technical analysis tools.
Flat trading
In the financial market, it is not always possible to detect a strong price movement in a certain direction (decrease or increase). Quite often, you can observe a flat on the chart.
The term “flat” is understood to mean a situation in which the movement of the market price occurs horizontally. A characteristic feature is a slight price fluctuation. Under such circumstances, the Keltner channel becomes narrow, and the price periodically bounces off its borders. In this case, the price difference in the maximum and minimum remains small.
For many traders, a flat market situation is a signal for successful trading. The profit from each transaction is small, but the number of orders can compensate for minor fluctuations.
Unlike Bollinger Bands
Many novice traders wonder about the difference between the Bollinger Bands and the Keltner Channel. The appearance of this question is explained by some similarities in the appearance of these indicators and the general principles of construction.
There are several differences.
- Keltner Channel can be called smoother, since ATR is a more stable indicator compared to standard deviation. As a result of using such data, the line is smooth and devoid of many noises present in the Bollinger Bands.
- The difference lies in the features of use. The Keltner channel indicator is based on ATR, which allows you to get a corridor with one width throughout. This feature facilitates the use of any trading strategy ..
Benefits of Using the Keltner Channel
The frequency of use of this trading instrument is explained by several advantages of the indicator.
- Universality. You can apply such an indicator on all types of timeframes and for any currency pair. To do this, you will only need to adjust the data in the settings.
- Ease of use. The Keltner channel indicator for MT4 is suitable for experienced traders and for beginners. This is explained by the absence of complex constructions: it is enough to indicate the initial data for the calculation.
- No extra noise on the chart. Compared to some other technical analysis tools, the Keltner Channel not only provides information about the direction of the trend, but also allows you to get clear signals about the start of trading.
Tool flaws
Like any other indicator for trading in the financial market, this tool has several drawbacks.
- Lack of universal settings. The need to make adjustments to the calculations can be called a kind of drawback. The fact is that for each timeframe you should carefully select the data. Otherwise, the trade will be ineffective.
- The need to use additional tools. It is possible to easily determine the direction of the trend and identify signals of the next change in directions using the Keltner channel. There are special courses in Emanzhelinsk and other cities of Russia that teach you to use trading strategies, because additional tools will be required to drop false signals here.
So, the Keltner Channel is an indicator for trading in the financial market, which has earned wide popularity due to its convenience and ease of setup, the ability to use on a chart with absolutely any source data. Forex experts point to its high efficiency. However, to achieve such indicators, you will need experience in tracking signals and developing a strategy using additional tools. In addition, it is worth entering data on the Keltner channel into the adviser, which greatly optimizes the process.