How to Apply and Use the Keltner Channel

How to Apply and Use the Keltner Channel

The Keltner Channel is a simple but powerful trading indicator.

It helps you better time your entries, improve your winning rate, and can even “predict” market turning points, and if you want to learn how to do it, then be sure to read on.

What is a Keltner Channel and How Does it Work?

The Keltner Channel is an Envelop-based indicator. This means it has an upper and lower boundary to help you identify potential “overbought and oversold” levels.

The default Keltner Channel settings have three lines to it:

  • Middle Line: 20-period Exponential Moving Average (EMA)
  • Upper Channel Line: 20 EMA + (2 * Average True Range)
  • Lower Channel Line: 20 EMA – (2 * Average True Range)

You can think of the Middle Line as the mean, and the Upper and Lower Channel Line shows you how far the price is away from the mean. Let’s start by taking a look at the following chart.

(By the way, you can find the Keltner Channel Indicator under the “Indicators” tab in TradingView).

Keltner Channel vs Bollinger Bands

The difference between the Keltner Channel indicator and the Bollinger Bands indicator is the way Channel Lines are calculated.

Keltner Channel uses Average True Range and Bollinger Bands uses Standard Deviation. If you compare the two, you’ll realize Keltner Channel is “smoother” compared to Bollinger Bands.

What to Watch Out For

Don’t make this common mistake when using the Keltner Channel indicator.

You don’t buy just because the price is at the Upper Keltner Channel.

Why?

Because in a strong uptrend, the price can remain “overbought” for a long period. (And vice versa for
a downtrend.)

Take a look at the example provided below.

Note the continuously overbought levels at USD/TRY Daily timeframe:

So how do you use the Keltner Channel? That’s what we will cover next, so stay with me and I’ll show you.

How to Use Keltner Channel to “Predict” Market Turning Points

Here’s something you may not know. Price reversals usually occur when there’s an extreme move into market structure (like Support or Resistance).

You’re probably thinking, “But how do I identify an extreme move?”

That’s where Keltner Channel comes into play.

All you need to do is, look for the price to close OUTSIDE the Keltner Channel. This tells you the price is at an extreme level — far from the mean.

Here’s an example of where the price closed outside outside the Keltner Channel on the USD/JPY using the Daily timeframe.

Oh, and did you notice that in our first example we were looking at the USD/TRY, and in our second example, we used the USD/JPY? Yes, this indicator works on any Instrument.

Take a look below.

Now before you think, “Oh, the price has closed outside of the Lower Channel Line. Time to buy!”

Hold on Skippy.

Remember, in a strong downtrend, the market can “hug” the Lower Channel Line for a long period.
That’s why you need another signal to tell you the market is likely to reverse higher.

So, what is it? Excellent question.

Price Rejection at Market Structure. This means that you want the price to come into Support and Resistance and get rejected from it.

Here’s an example . . .

Look at the price rejection at support on USD/JPY using the Daily timeframe:

Now take a look at the price rejection and bullish close in the following chart below.

Let’s Summarize and Recap

  1. The price closes outside of the Lower Keltner Channel Line
  2. The price is at Support
  3. You get a MAD SCALPER, Luca Brasi, Frankie Five Angels signal or a strong bullish price rejection (like Hammer, Bullish Engulfing Pattern, wedge etc.)
  4. The opposite is true for short setups

How to Identify Different Market Conditions and Improve your Winning Rate

As you know, the market is always changing — it can be in an uptrend, downtrend, or range.

On hindsight, it’s easy to identify the current market condition. But in real-time, things are a lot more
difficult, right?

Well, the good news is that you are about to learn a technique to help you identify market conditions in real-time so you can improve your winning rate.

To start, Insert the Keltner Channel and 50-period Simple Moving Average on your charts. (You can also use the 200 Simple Moving Average.

Now, you’ll see one of three things…

  • If the entire Keltner Channel is above the 50SMA, then the market is in an uptrend
  • If the entire Keltner Channel is below the 50SMA, then the market is in a Downtrend
  • If the 50SMA is inside the Keltner Channel, then the market is in a range.

Here’s an example of an uptrend on USD/TRY Daily timeframe:

Now let’s take a look at an example of a range market on NZD/JPY Daily timeframe:

So how do you make use of this information?

  • If the market is in an uptrend, you look to buy.
  • If the market is in a downtrend, you look to sell.
  • If the market is in a range, you can “buy low and sell high” within the boundaries of the range.

Super simple, and the great thing about this Indicator is that you can use it on any Instrument, and any timeframe, including the 1 minute!

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