It is volatility based technical indicator consist of three separate lines. The middle line is called Exponential Moving Average and other two lines are placed above and below it. The upper band is placed above the exponential moving average set two times the Average True Range, and lower band is placed below the exponential moving average set two times the average true range. As volatility expands and contracts, the bands also expands and contracts.
Keltner Channel is typically used to identify possible price breakouts and readings of overbought and oversold. Keltner Channel is much similar to Bollinger bands, but it uses average true range instead of standard deviation. This indicator was firstly introduced by the Chester Keltner in 1980. The idea was further simplified and expanded by the Market Wizard and a hedge trader, Linda Bradford Raschke. Linda Bradford Raschke popularized the placement of exponential moving average in the middle and average true range for upper and lower bands.
In order to identify overbought or oversold levels and market direction, trader must need to know the price is ranging or trending. For this purpose you have to make use of different strategies.
Breakout Strategy:
Keltner Channel lines are usually designed to surround most of the price action. When price action break out of the Keltner lines, at this time, breakout strategy is used. The user of this channel pay close attention when price move above or below the bands, because this occur very rarely. Price above the upper channel indicate go long signal while price below the lower channel signify go short.
Buy Signal – in an uptrend when price touches the middle line, exit from sell trade. If price further rise and close above the upper channel, take long buying position.
Sell Signal – in downtrend, when price touches the middle line, it’s time to exit from buy position. If price further decline and close below the lower line, it’s time to enter long time sell position.
Trend Pullback Strategy:
This forex strategy is used when price is in strong trend. Rather than to take any sell or buy position, you wait for the price to back on trend after short weakness. In this strategy, exponential moving average is used.
Buy Signal – During a strong uptrend above the middle line, if price close below the EMA, wait for forces to pullback price to its trend. After short weakness, price jump above the middle line and continue it’s up trend.
Sell Signal – if price is trading continuously below the middle line, its means that seller are heavy on market. During this downtrend, if price dramatically move above and close above the EMA, don’t chase it. After short time, price will jump back to continue its down trend.
Overbought and oversold: Traders can also identify signal of overbought or oversell of any commodity or currency.
Overbought – There is strong overbought signal when price close below the lower line but after short period of time price move upward and close inside the lower line and then above the middle line.
Oversold – there is signal of oversold when price close out of the upper channel but within short period of time, price dramatically close inside the upper channel and after that below the middle line. It is strong sell signal which indicate that sellers are heavy on specific price of currency.
The Keltner Channel help to identify market direction. They have best forecasting ability but didn’t act as support or resistance level. The Keltner Channel could be more helpful and profitable if used in conjunction with price action, technical indicators and fundamentals.