Here we take a look at trading pullbacks using the Keltner Channels. I cover the initial setup, the types of entries, and trades to avoid.

This setup contains 3 parts:
  1. The channel touch
  2. The Pullback
  3. The Entry


The Channel Touch

Here is an example of the beginning signal in our setup, a band touch. The top and bottom bands represent the ATR (Average True Range) of a loopback period. So a touch of the band indicates volatility in the underlying stock or commodity. This also presents us with a chance for a nice pullback with continuation.

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The Pullback

The pullback is simple, it is a reversion to the mean. So, the price pulls back to the mean (the ema) that the Keltners are based on. From this point, you can start to determine the entry.

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The Entry

Depending on your style, a stop order, or limit order trader, you get to create your style to enter the trade. The following are some ideas: zero line MACD cross, second entry (price action) long or short, a trigger zone (for limit order traders), and an ema touch (limit order traders).

Zero Line Entry

Price pulled back and crossed the zero line on the modified MACD indicator.

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Second Entry Long (High2)

The entry is the second attempt to break the previous bars high in a pullback.

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The Trigger Zone

I created these based on an internal Keltner channel. You can set your limit orders anywhere inside of them.

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EMA Touch

Whenever the price touches an offset ema you can enter. So you can place and move your limit order as the ema moves. I like to offset by one because you are guaranteed a price touch (ema doesn't move). Backtesting is also my accurate with an offset ema.

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Conclusion

The Keltner channels offer an extremely powerful way to determine a potential pullback within a trend. They also help define trends (on the first touch) and help objectively identify climatic behavior. This strategy as a whole allows for high-quality setups and the flexibility of entering and exiting trades based on trading style. I like to shoot for a 1:1 based on stop placement.
Chart PatternsTechnical IndicatorskeltnerchannelpullbackstradingstrategiesTrend Analysistrendtrading

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