The nature of Forex trading has made it seem like a never-ending ocean. You will feel constant waves of profit and loss, and the volatile environment has made currency trading an endeavor that is as alive and uncertain as an actual ocean. Once you get your foot into the door of Forex trading, you will realize how much you have to train yourself to manage it.
As you know, there isn’t any way you can put a saddle on the ocean to control it. To conquer it, you have to make yourself a competent sailor. Likewise, to rule the Forex market, you must make yourself a skilled and professional Forex trader. There is only one way you can do that, by learning about all the concepts and instruments required to analyze any situation and deal with it. The Keltner Channel (KC) is one such instrument.
Learning about Keltner Channels
The Keltner Channel (KC) is a type of volatility indicator that Chester Keltner introduced in 1960. Chester was a grain trader who wrote about it in one of his books, “How to Make Money in Commodities.” Later, another writer named Linda Raschke revised and republished the book in 1980.
The latest version of the book has gained more popularity, and people adopt that version of the Keltner Channel, which is almost identical to the Bollinger Bands. Like Bollinger Bands, KCs also use three lines.
But in the middle of this indicator remains an Exponential Moving Average (EMA) stroke and the other two exterior lines use an Average True Range (ATR) instead of a Standard Deviation (SD). While dealing with such advanced tools, try to trade with the best trading platforms.
As the channel has been derived from the ATR, like SD, it is also a volatility indicator. The KC expands and contracts with fluctuation. But not to the extent that the Bollinger Bands do.
These indicators help traders by guiding them in setting entries and exits for their trades. They also help people discern oversold and overbought levels relative to the moving average, mostly when the market movement becomes flat. Besides, they also give away cues for new movements.
If you know about Bollinger Bands, you must be contemplating that KCs are actually kin to those Bands. Well, you are partly right.
What makes these market volatility indicators aberrant are some hidden indicators and estimations that are not necessary to discuss or waste your time on.
How to Use Keltner Channels
KCs show the territory where a currency pair would typically be apart. The top of the channel is normally known as the dynamic resistance, while the bottom of the channel works as a dynamic support.
For the KCs, the most used settings are EMA (20) for the middle stroke and for the upper and lower strokes 2 X ATR (10). The middle stroke here is pretty remarkable, as it seems to act as a pullback level during an ongoing trend.
In an upward movement, the price of a currency pair tends to be captivated in the cannel’s Upper Half, it is mostly between the midline for support and the upper line of resistance.
In a downward movement, the price usually settles around a channel’s bottom half, finding resistance at the midline and bottom line as support.
For a market condition, price normally swings up and down between the bottom and the top lines.
Trading Breakouts Using KCs
Breakouts derived from KCs give a robust hint where the price is running ahead to the next position. If the candles seem to break out near or far above the top, the trend will normally proceed upward. The opposite is true for candles that break below the bottom. Click here to learn more about the advanced trading methods and the proper use of the Keltner channels without any risk exposure.