Keltner Channel RSI Momentum Trading Strategy for MT5

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Keltner Channel RSI Momentum Trading Strategy - Buy Entry

Momentum breakouts are excellent trading opportunities where traders can easily make a profit. It is often characterized by a sudden shift in market direction and a break from a trading range or a prior support or resistance level. This type of setup is what most price action traders look for when trading on the pullbacks that occur after the momentum breakout. This strategy shows us how we can objectively find momentum breakouts and trade their pullbacks using two technical indicators.

Keltner Channel Indicator

The Keltner Channel indicator was first introduced by Chester Keltner during the 1960s in his book “How to Make Money in Commodities”, but it was later updated by Linda Bradford Raschke in the 1980s.

The Keltner Channel is a technical indicator that features a set of lines that form a band-like structure that typically envelopes and follows price action.

This indicator is composed of three lines – a middle line and a couple of outer lines drawn above and below the middle line. The middle line is a moving average line, which is typically set as a 20-bar moving average line. The first version of the Keltner Channel uses a Simple Moving Average (SMA) line to calculate its middle line, however, the updated version uses an Exponential Moving Average (EMA).

This version allows for both calculations. It also has a feature in which the color of the middle line changes to indicate the direction of the trend. The outer lines on the other hand are calculated as a multiple of the Average True Range (ATR) added and subtracted from the middle line shifting the two lines above and below the middle line. These three lines form a channel that typically envelopes prices within a range.

Since the Keltner Channel is based on moving average lines, it can also be used to objectively identify the direction of the trend. Traders may identify the direction of the trend based on where price action typically is about the middle line.

Given that the outer lines are based on the ATR, the Keltner Channel may also function as a volatility indicator. The channel expands whenever volatility is increasing and contracts whenever volatility is decreasing.

The outer lines can also be used to identify momentum breakouts. Strong momentum candles closing above the upper line may indicate a bullish momentum breakout while strong momentum candles closing below the lower line may indicate a bearish momentum breakout.

Keltner Channel Indicator

Relative Strength Index

The Relative Strength Index (RSI) is an oscillator type of technical indicator that indicates the direction of probable price movements based on historical price data. It detects the magnitude of recent price changes by comparing the current price with the recent historical price data.

The RSI presents momentum direction using an oscillator line which oscillates within a fixed range of 0 to 100. This range also typically has markers at levels 30 and 70 which represent the threshold for the normal range of the market. RSI values dropping below 30 indicate an oversold market while values above 70 indicate an overbought market. Both these market scenarios are prime conditions for a potential mean reversal.

Aside from identifying overextended markets, the RSI can also be modified to help traders identify the direction of the trend or its bias. Traders may markers at levels 45, 50, and 55. The marker at level 50 is used to help traders identify the general direction of the trend. The line stays above 50 in an uptrend and below it in a downtrend.

The levels 45 and 55 may be used as support and resistance levels for the RSI. The RSI may find support at 45 whenever the market is in an uptrend and resistance at 55 in a downtrend. Breaks beyond these levels may indicate a potential reversal especially when accompanied by strong momentum in price action.

Relative Strength Index

Trading Strategy Concept

This trading strategy is a momentum continuation strategy that trades on the second impulse right after a momentum breakout. This type of trade setup is similar to the trade entries that price action traders make when trading on the pullback after a momentum breakout.

To implement this strategy, we will need the Keltner Channel indicator and the RSI. The Keltner Channel is used to identify momentum breakouts as well as the pullback area. The RSI on the other hand confirms the breakout as well as the support or resistance area as the price pulls back.

The momentum breakouts are identified by momentum candles closing outside the Keltner Channel. This should be in confluence with the RSI line breaking either the 45 or 55 marker.

Price should then pull back towards the middle line of the Keltner Channel then show signs of price rejection in the area. This should be accompanied by the RSI line curling away from the marker at level 50.

Buy Trade Setup

Entry

  • A bullish momentum candle should break above the upper line of the Keltner Channel.
  • The RSI line should break above 55.
  • Price action should pull back towards the middle line of the Keltner Channel and show signs of price rejection.
  • The RSI line should pull back towards the 50 area and curl back up.
  • Open a buy order on the confluence of these signals.

Stop Loss

  • Set the stop loss below the entry candle.

Exit

  • Close the trade as soon as price action shows signs of a bearish reversal.

Keltner Channel RSI Momentum Trading Strategy - Buy Entry

Sell Trade Setup

Entry

  • A bearish momentum candle should break below the lower line of the Keltner Channel.
  • The RSI line should drop below 45.
  • Price action should pull back towards the middle line of the Keltner Channel and show signs of price rejection.
  • The RSI line should pull back towards the 50 area and curl back down.
  • Open a sell order on the confluence of these signals.

Stop Loss

  • Set the stop loss above the entry candle.

Exit

  • Close the trade as soon as price action shows signs of a bullish reversal.

Keltner Channel RSI Momentum Trading Strategy - Sell Entry

Conclusion

This strategy which features a momentum breakout and a pullback entry provides excellent trade setups which traders can easily profit from. However, this strategy should be used in the context of the market structure and price action because the concept behind this strategy simply supports and coincides with the typical momentum breakout and pullback price action.

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