We continue with the series of articles on trading training, where we will teach you the origin and functioning of all types of indicators, how to interpret them and what signals can be used to apply them to our analyses. We have different types of indicators, whether volume, trend, oscillators and other types. In today's trading training we are going to talk about the Keltner Channel indicator and how we can take advantage of it in our daily trading.
What is the Keltner Channel indicator?
Let's start this trading training by explaining what this indicator is about. The Keltner Channel indicator is an indicator that allows us to measure the volatility of a specific asset. Additionally, this indicator allows us to identify different characteristics within an asset, such as the ongoing trend, overbought and oversold levels or trend reversals. Was created by Chester W. Keltner (hence the origin of its name), commodity trader who patented the indicator in the 1960s. This indicator is similar to the bollinger bands, an indicator that we taught you in previous installments for your trading training. It has certain similarities with its namesake, but we will see how they differ.
How is the Keltner Channel indicator measured?
Let's now see how this indicator is measured to understand in depth how it works. As we have commented in the previous paragraph of this trading training, the Keltner Channel indicator is used to measure price volatility and in turn allows us to detect overbought, oversold zones, trend reversals and the ongoing trend. Unlike Bollinger Bands, the Keltner channel is based on a combination of an exponential moving average and the ATR. Thanks to this combination, the signals provided by the Keltner Channel are more precise than those offered by the Bollinger bands.
As we can see in the graph above, the Keltner Channel (above in yellow) at first glance is like the Bollinger bands (below in blue), but if we compare its development, we can see how the Keltner Channel is more precise .
How is the Keltner Channel indicator calculated?
The formula for calculating the Keltner Channel indicator has certain similarities with Bollinger bands. As we have commented in the previous paragraph of this trading training, the main difference of this indicator is that it is based on a moving average combined exponential along with ATR. Therefore, the values of the Keltner Channel calculation formula would be the following: -Baseline: Exponential moving average of 20 periods. -Upper channel: 20-period exponential moving average + (2 x ATR (10 periods)). -Lower channel: 20-period exponential moving average + (2 x ATR (10 periods)).
How can we use the Keltner Channel indicator for our trading training?
Now that we have seen what this indicator is, how it is measured and its calculation formula, let's follow the trading training to see how to interpret it. As we have mentioned, the indicator helps us measure the current volatility of an asset and the overbought/oversold zones, as well as the current trend or trend reversals. Therefore, it will be of great help to us to find optimal entries and exits in our operations. Let's see how to take advantage of the Keltner Channel for our trading training:
Analyze the inclination of the Keltner Canal.
One of the simplest ways to take advantage of this indicator is to look at the inclination that develops on the graph. In this way, we can determine the current trend and, in turn, moments in which the price may begin to show signs of weakness. These signs of weakness would allow us to detect trend turns that we could take advantage of along with the step that we have explained in the previous paragraph of this trading training.
Overbought and oversold zones.紐♂️
The Keltner Channel helps us identify situations in which an asset is in an overbought or oversold zone. When we see that the price of an asset slides outside the lower channel, we can interpret that the price has fallen too much and is close to rebounding.
On the other hand, if the price breaks above the upper channel, the asset may be entering the overbought zone and preparing for a pullback. In this way, we can buy or sell the asset in question when it is leaving these channels and see how far it is from the base.
Compression of the Keltner Canal.
The last strategy in this Keltner Channel trading training is about taking advantage of insights. As we learned previously with Bollinger bands, the price experiences contractions when the price comes from a period of high volatility, which requires a break to regain strength. The moment we see that an asset little by little has the upper and lower channel increasingly closer together, a movement is consolidating.
Finally, when the movement has been consolidated, the price begins a larger movement in one of the two directions. As a tip, pay attention to what movement you just made, since in compressions, the price usually heads in the opposite direction from where it came.
Conclusions from this trading training on the Keltner Channel indicator.
After finishing this trading training on the Keltner Channel indicator, we are going to review its strengths. As we have seen, this indicator has certain similarities with the Bollinger bands, but unlike the former, the Keltner channel measures the upper and lower channel based on an ATR. Next, we have seen the appearance and calculation formula of the indicator to understand what the signals it provides us are based on. Finally, we have learned how we can take advantage of the Keltner Channel in our operations to detect signals that help us position ourselves in the market. Once again, we remember that the use of these indicators is highly recommended to combine them with others of different types (volume, trend, volatility or momentum).