Introduction to the Keltner Channel Indicator
Band-types or Channel-types of technical indicators are some of the most versatile types of technical indicators. It often can be used to identify momentum, trend direction, volatility, and oversold or overbought market conditions.
What is the Keltner Channel Indicator?
The Keltner Channel indicator is a band-based technical indicator which plots a channel around price action. This indicator can help traders identify trend direction, momentum, volatility, as well as mean reversals coming from overbought or oversold price levels.
It is somewhat similar to the Bollinger Bands. The difference is that it plots a smoother structure compared to the Bollinger Bands.
How the Keltner Channel Indicator Works?
This version of the Keltner Channel uses a Simple Moving Average (SMA) line as a basis for the middle line of the channel. It then plots the SMA line as a blue dot-dash line.
The outer lines of the Keltner Channel are based on the SMA line, shifted above and below the middle line. It uses an Average True Range (ATR) as a basis for the shift of the lines. It then plots the outer lines as solid red lines using this formula.
This creates a channel-like structure which is based on an SMA line, which also indicates volatility based on the ATR.
How to use the Keltner Channel Indicator for MT4
The Keltner Channel indicator has one variable within its settings. It allows traders to modify the “Period”, which is the number of periods used for computing the Simple Moving Average line.
There are various ways to use the Keltner Channel indicator.
It can be used as a volatility indicator based on the expansion and contraction of the channel.
It can also be used to determine trend direction based on where price action generally is in relation to the middle line.
It can also be used as a mean reversal indicator based on price action rejecting the outer lines.
It can also be used as a momentum breakout indicator based on a strong momentum candle closing beyond the outer lines of the channel.
Buy Trade Setup
When to Enter?
Open a buy order as soon as a strong bullish momentum candle closes above the upper outer line of the Keltner Channel. Set the stop loss below the entry candle.
When to Exit?
Close the trade as soon as price action shows signs of a possible bearish reversal.
Sell Trade Setup
When to Enter?
Open a sell order as soon as a strong bearish momentum candle closes below the lower outer line of the Keltner Channel. Set the stop loss above the entry candle.
When to Exit?
Close the trade as soon as price action shows signs of a possible bullish reversal.
Conclusion
There are many ways to use the Keltner Channel. As mentioned above, it is a very versatile technical indicator. It can provide traders with a lot of information regarding the current market condition using only a single technical indicator. It can also be used to trade various trade setups, whether momentum breakouts, mean reversals, or trend following strategies, using only this indicator.
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