Keltner Bands Pullback StrategyHere 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:
The channel touch
The Pullback
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.
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.
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.
Second Entry Long (High2)
The entry is the second attempt to break the previous bars high in a pullback.
The Trigger Zone
I created these based on an internal Keltner channel. You can set your limit orders anywhere inside of them.
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.
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.
Keltnerchannel
Correlations of Retail Stock Traders & Carl Jung's Archetypes Carl Jung, a renowned Swiss psychiatrist and psychoanalyst, introduced the concept of archetypes as universal patterns or symbols that reside in the collective unconscious.
Carl Jung's archetypes , rooted in the collective unconscious, offer profound insights into human behavior and decision-making processes.
(archetypes example would be the Devil and Angel on your shoulder, Jung beleives there is more to it that good and evil)
Retail stock traders, operating in a dynamic and often volatile market, are not exempt from these archetypal influences.
Let's explore the correlations between Jungian archetypes and how they impact the decision-making process of retail stock traders when executing trades.
The Hero Archetype:
The Hero archetype drives traders to conquer challenges and attain success. Within retail stock trading, this archetype encourages traders to take calculated risks, seize opportunities, and exhibit unwavering confidence in their decision-making abilities. While the Hero can inspire bravery and determination, traders must be mindful of impulsive and overly aggressive behaviors that may lead to irrational choices.
The Sage Archetype:
The Sage archetype embodies wisdom, knowledge, and the pursuit of truth. Retail stock traders influenced by the Sage archetype engage in extensive research, analysis, and due diligence before executing trades. They seek to understand market dynamics, uncover patterns, and leverage their intellectual prowess to make informed decisions. However, an excessive reliance on analysis may result in analysis paralysis, inhibiting timely execution.
The Jester Archetype:
The Jester archetype represents humor, spontaneity, and irreverence. In the world of retail stock trading, this archetype may manifest as traders who adopt a lighthearted approach and embrace risk with a sense of playfulness. Jester-influenced traders may be inclined to explore unconventional trades, pursue novelty, and seek excitement. Nevertheless, caution must be exercised to avoid impulsive or reckless decision-making.
The Caregiver Archetype:
The Caregiver archetype embodies compassion, empathy, and a desire to nurture others. In retail stock trading, traders influenced by this archetype prioritize socially responsible investing, seeking companies aligned with their values. They consider sustainable practices, ethical considerations, and impact investing as integral components of their decision-making process. However, emotional attachments to causes may cloud judgment, necessitating a balanced approach.
The Magician Archetype:
The Magician archetype symbolizes transformation, power, and the ability to manifest desired outcomes. Traders influenced by the Magician archetype possess intuitive market understanding and employ strategies that seem almost mystical. They may rely on technical analysis, precise timing, and sophisticated algorithms or trading systems. However, an overreliance on intuition without grounding in tangible data may result in unreliable decision-making.
The Shadow Archetype:
Carl Jung's concept of the shadow archetype represents the darker, suppressed aspects of the psyche. In retail stock trading, the shadow can manifest as greed, fear, impulsivity, or an inclination toward unethical practices. Traders must confront their shadows and acknowledge the potential biases and emotional influences that can cloud judgment. By bringing the shadow into conscious awareness, traders can make more objective and rational decisions.
Impact on Decision-Making Process:
The interplay between these archetypes and the shadow profoundly affects the decision-making process of retail stock traders. Awareness of these archetypal influences enables traders to leverage their strengths while mitigating potential pitfalls. Recognizing the shadow archetype's presence allows traders to confront their biases, manage emotions, and make more rational and ethical decisions.
Understanding the correlations between Carl Jung's archetypes and the decision-making process of retail stock traders sheds light on the intricate psychological factors at play within financial markets.
By recognizing and integrating these archetypal influences into their decision-making process, traders can enhance self-awareness, improve emotional regulation, and ultimately make more balanced, informed, and profitable trading decisions.
A Tutorial on How to Use Keltner ChannelsLooking for a way to determine market trends and momentum? Keltner Channels may be the tool you’re looking for. This volatility-based indicator can help you get a clearer picture of the market and identify potential trading opportunities. In this article, we’ll take a closer look at Keltner Channels, how they work, and how you can use Keltner Channels in trading.
What Is the Keltner Channel Indicator?
The Keltner Channel is a popular indicator used to help determine trends, momentum, and potential reversal points in the market. Keltner Channels were invented by Chester Keltner in the 1960s, with a modified version being released in the 1980s.
Keltner Channels consist of three lines plotted on a chart. The middle line is an exponential moving average (EMA). While the original Keltner Channel used a high-low range to plot the upper and lower lines, the updated version commonly found today uses Average True Range (ATR).
The Keltner Channels expand and tighten based on volatility in the market. Given that most price action occurs within the bands, moves outside the channel are significant. They can indicate a strong trend forming, a breakout, or a potential reversal incoming, determined by price action and other technical indicators.
Keltner Channels Settings
Keltner Channels work across all timeframes, so feel free to use them in whichever period you feel most comfortable with.
There are two components to the Keltner Channel: the EMA and ATR multiplier. The EMA is often set to 20 periods, providing a good balance between responsiveness and stability.
The upper and lower bands are determined by a multiplier of the ATR. Two times the ATR is typical for many traders, but you can increase the number of signals by reducing the multiplier to 1 or 1.5. Be cautious that this may also increase the number of false signals you receive. To get the lower band, you need to multiply the ATR by a multiplier and subtract that number from the EMA. To get the upper band’s value, you need to multiply the ATR by a multiplier and add that number to the EMA.
How to Use Keltner Channels
Like other volatility-based indicators, like Bollinger Bands, there are multiple ways to interpret Keltner Channels. At its most basic, an upward-sloping channel indicates a bull trend, while a downward-sloping channel shows a bear trend. A flat channel means that the price is in a range.
Most of the time, the price will bounce between the channels, using them as dynamic support/resistance levels. When a trend is strong, it tends to stick to the upper or lower bound, continually hitting the lines. A pullback to the EMA is where traders often jump on the trend.
Additionally, Keltner Channels can be used to identify breakouts. This is most effective when following a range, as a break above the channel can indicate bullish momentum coming into the market and vice versa.
Lastly, Keltner Channels can also signal oversold or overbought areas. A move outside of a bound that then closes back inside of the channel, usually within one or two candles, can indicate that a reversal is inbound.
However, predicting reversals using Keltner Channels alone can be tricky, as the price will often retrace slightly before continuing to trend. It’s best to use Keltner Channels for trading trends and breakouts until you become more proficient with the indicator.
Keltner Channel Trading Strategy
Now that we have an idea of what Keltner Channels are, how to interpret them, and how to set them up, let’s look at some Keltner Channel trading systems. We’ll cover the two most effective applications: trend following and breakout trading.
We’ve used the free TickTrader platform, offered by us at FXOpen, to demonstrate the strategies. To better understand how they work, you can try the TickTrader platform and use the Keltner Channel indicator for yourself.
Trend Following
Entry: You can wait for two consecutive closes outside of the band (indicating momentum) with a sloping channel, then enter on the retest of the EMA. For example, two candles close above the upper bound with an upward-sloping channel.
Stop Loss: Just beyond the opposing bound. As the trend progresses, you could also trail the stop above or below swing points or the opposite line.
Take Profit: Profit-taking is flexible here. You could begin to take profits the next time the price closes outside of the band and then moves back inside, or use a Fibonacci extension to project potential reversal levels. Alternatively, you might set a specific risk/reward ratio, like 1:3, and exit once you’re happy with your returns.
In this example, we see the price bullishly moving outside the upper band with no signs of trend exhaustion. There’s also extra confluence from a larger overall bullish trend on the left-hand side, just off-screen. We then see the channels begin to slope downwards as bearish pressure enters the market with a large engulfing candle (entry 3). The EMA acted as an ideal place to enter in all three scenarios.
Breakout Trading
Example 1:
Example 2:
Entry: The first thing to look for is an extremely bullish or bearish candle that closes well beyond the channel. Often, it’ll stand out from recent price action and will have little to no wicks. You could also look for an additional close outside of the channel to qualify the signal if desired. Traders enter on the retest of the bound the price broke out from.
Stop Loss: Since the idea is that momentum will continue with little movement back inside the channel, you could set a stop just above or below the EMA, depending on the direction of the trade, as seen in the first example.
As in the second example, you might place the stop above or below the opposing band for a more conservative approach. Again, you can also choose to trail your stop, either just beyond the channel, above or below key swing points, and above or below the EMA.
Take Profit: You could wait for the price to make another retest of the upper/lower bound once it moves beyond the high or low of your signal candle to start taking profits. Or, you could wait for a reversal candle to form, like a hammer or shooting star, that closes within the channel to take profits.
In both examples, the price breaks out of the channel with momentum following a sideways range. Traders can jump in on the retest of the channel’s bands before the strong momentum continues. In the first example, a stop above the EMA would have been suitable, while it would have seen you stopped out in the second. But, taking a more conservative approach allowed us to ride the trend and potentially make more profit.
What to Do Next
You now have a comprehensive overview of Keltner Channels and how to apply them to the markets. However, understanding is just the first step in using Keltner Channels to trade. Here are some actionable steps you can follow to make the most out of the indicator:
1. Practice using Keltner Channels with live charts, using this article to complement your observations. You can use TickTrader to help you with this.
2. Note your observations, and try to come up with your own strategy. You could combine Keltner Channels with other indicators like RSI for extra entry confirmation.
3. Feeling ready to trade for real? You can open an FXOpen account and put your strategy to the test.
4. Expand your knowledge by reading up on related indicators, like Bollinger Bands and Average True Range.
This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
Choosing Your Channel: Bollinger, Donchian, or Keltner?When it comes to trading financial instruments, traders have a plethora of technical indicators to choose from. Among these, Bollinger Bands, Donchian Channels, and Keltner Channels stand out as popular tools for analyzing price movements and identifying potential trading opportunities. Each of these channels has its advantages and unique methods of application. This blog will compare these three channels and provide examples of how each can be used, helping you decide which one is right for you.
I. Bollinger Bands
Understanding Bollinger Bands
Bollinger Bands, developed by John Bollinger in the 1980s, is a volatility-based indicator that measures the standard deviation of price movements. It consists of three lines: a simple moving average (SMA) and two bands that are typically set at two standard deviations above and below the SMA. The distance between the bands adjusts as volatility increases or decreases.
Using Bollinger Bands
Bollinger Bands are useful for identifying price movements and potential reversals. When the bands contract, it indicates low volatility, and when they expand, it signals high volatility. A common strategy is to look for a breakout or breakdown when the bands contract.
Example: If a stock's price has been trading within a narrow range, and the Bollinger Bands contract, a trader might anticipate a breakout or breakdown. If the price breaks above the upper band, it could signal a bullish trend, while a break below the lower band suggests a bearish trend. This breakout should be confirmed with other indicators such as the MACD or RSI.
II. Donchian Channels
Understanding Donchian Channels
Donchian Channels, developed by Richard Donchian in the 1960s, is a trend-following indicator that measures the highest high and lowest low over a set number of periods, typically 20 periods. It consists of three lines: the upper channel line, the lower channel line, and the middle line, which is the average of the upper and lower lines.
Using Donchian Channels
Donchian Channels are primarily used to identify potential breakouts and breakdowns. Traders often use the channels to assess the strength of a trend and determine entry and exit points. The Donchian cloud can be a great tool for establishing lines of support and resistance as the price makes higher highs and lower lows and conversely lower highs or lower lows.
Example: If a stock's price is consistently hitting highs, a trader might use the Donchian Channels to identify a possible breakout. If the price breaks above the upper channel line, it could signal a continuation of the bullish trend. Conversely, if the price breaks below the lower channel line, it may indicate a potential trend reversal. I typically look for a secondary lower high or higher lower to confirm a reversal and then confirm the breakout with an oscillator as seen in the example below.
III. Keltner Channels
Understanding Keltner Channels
Keltner Channels, developed by Chester Keltner in the 1960s and later modified by Linda Raschke, is a volatility-based indicator that uses the average true range (ATR) to measure price movements. It consists of three lines: an exponential moving average (EMA) and two bands set at a multiple of the ATR above and below the EMA.
Using Keltner Channels
Keltner Channels are effective for identifying potential trading opportunities during trending markets and can be used in conjunction with other indicators to confirm price movements. The Keltner Channel is a great tool for identifying overbought/ oversold conditions in a trend. This can help traders find better points of entry for a trade.
Example: A trader might use Keltner Channels to identify potential pullbacks in a trending market. If the price moves above the upper channel line during an uptrend, it could signal an overbought condition, and the trader might wait for the price to pull back toward the EMA before entering a long position. Similarly, if the price falls below the lower channel line during a downtrend, it might indicate an oversold condition, and the trader could wait for a bounce back toward the EMA before entering a short position. The trader should also verify the bounce with other indicators as shown below.
IV. BONUS: Keltner/Bollinger Bands Squeeze Strategy
Channels do not have to be exclusively used on their own. The Keltner/Bollinger Bands Squeeze Strategy is a powerful technique that combines the strengths of both Keltner Channels and Bollinger Bands to identify potential trading opportunities. By understanding the nuances of this strategy, traders can significantly enhance their trading arsenal and make more informed decisions in the market.
The Squeeze: A Sign of Consolidation and Potential Breakout s
The Keltner/Bollinger Bands Squeeze occurs when the Bollinger Bands contract within the Keltner Channels, indicating a period of low volatility or consolidation in the market. This "squeeze" can serve as a precursor to significant price breakouts, either on the upside or downside. By closely monitoring this pattern, traders can identify periods of market consolidation and prepare to capitalize on potential breakouts.
How to Implement the Keltner/Bollinger Bands Squeeze Strategy
To implement this strategy, traders should follow these steps:
Overlay the Keltner Channels and Bollinger Bands on your chart: Start by adding both Keltner Channels and Bollinger Bands to your preferred trading platform's chart. Ensure that the settings of both indicators are adjusted to your desired values.
Identify the Squeeze: Look for periods when the Bollinger Bands contract within the Keltner Channels. This signifies a "squeeze" and acts as a sign that the market is experiencing low volatility or consolidation.
Monitor for Breakouts: Keep a close eye on the price action during the squeeze. When the Bollinger Bands expand outside of the Keltner Channels, this indicates a potential breakout from the consolidation period. The direction of the breakout (upwards or downwards) will depend on the overall market trend and price action.
Enter the Trade: The Keltner/Bollinger Bands Squeeze Strategy can be further enhanced by combining it with other technical indicators, such as the Relative Strength Index, or Moving Average Convergence Divergence. These complementary indicators can provide additional confirmation of potential breakouts and help traders better gauge market conditions. Once a breakout is confirmed, traders can enter a trade in the direction of the breakout. It's essential to use stop-loss orders and manage risk appropriately since false breakouts can also occur.
Exit the Trade: Traders should establish a price target and exit strategy based on their analysis and risk tolerance. This can include setting a specific profit target, using trailing stops, or leveraging other technical indicators to determine when to exit the trade.
Conclusion
Bollinger Bands, Donchian Channels, and Keltner Channels are all valuable technical indicators for analyzing price movements and identifying potential trading opportunities. When deciding which one is right for you, consider your trading style, preferred timeframes, and the specific characteristics of the markets you trade. It's essential to familiarize yourself with each indicator and practice using them in combination with other tools to enhance your trading strategy. We have even shown that these channels can complement each other to form a more comprehensive strategy. Remember, no single indicator is perfect, and incorporating multiple tools can help you gain a more comprehensive understanding of market dynamics. Good luck and happy trading!
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ETHUSD 1D KELTNER CHANNEL PULLBACK TRADING STRATEGYTrading Pullbacks with Keltner Channel
Trading pullbacks successfully can only be done in the presence of a strong trend. Using the Keltner channel indicator we can study how the price behaves around the upper and lower envelopes to gauge the strength of the trend.
As you already learned when the price hugs one of the two bands and crawls along with the band, we have a case for a strong trending market.
There will be highlighted small retracements while the price hugs the upper Keltner band. Notice that the price can retrace to the area around the 20-EMA. It won’t give you an exact price, but a price zone from where the price can potentially bounce and the bullish trend can resume.
This is a good way to measure pullbacks in price. Successful trading doesn’t require catching the exact turning point.
For a better timing of our trades, we can use the Stochastic RSI indicator in combination with the Keltner indicator for more confluence.
The trade trigger is simply to follow with this Keltner Channel pullback strategy. Pull the trigger when the price retraces to the middle band and the stochastic indicator develops a crossover from oversold territory.
BTCUSD 4H KELTNER CHANNEL RANGE TRADING STRATEGYTrading Ranging Markets with Keltner Channel
It is said that the number one account killer in the market is a ranging market. Consolidations are very difficult to trade. However, you can take advantage of the difference in the way the Keltner channel system can be used in combination with other technical indicators.
The price won’t really touch the bands when it bounces between the upper and lower envelopes. When we’re in a ranging market, you’ll often see that the price will fail to touch the bands. The majority of the time the price will hug the middle band.
This anomaly in price behavior requires us to use a secondary technical indicator to find profitable trades.
Since the Forex market spends most of its time in consolidation (around 70% of the time), it’s mandatory to have a range trading strategy to survive in this market.
For range trading, we like to use Keltner Channel bands in combination with a 2-period RSI indicator. We tweaked the RSI settings so we can better identify tops and bottoms within a trading range.
*Note #3: For this Keltner trading strategy we use the 90-10 levels of overbought and oversold readings.
Here are some rules that can guide you to make the best trading decisions:
Keltner envelopes need to turn flat, to signal a consolidation.
The price needs to break below the middle band.
A buy order is triggered once the 2-period RSI goes below 10 indicating oversold conditions.
The protective stop loss can be hidden on the other side of the Keltner band.
For the long side take profit when the RSI reaches the 90 levels.
TRADING PULLBACKS WITH KELTNER CHANNELTrading Pullbacks with Keltner Channel
Trading pullbacks successfully can only be done in the presence of a strong trend. Using the Keltner channel indicator we can study how the price behaves around the upper and lower envelopes to gauge the strength of the trend.
As you already learned when the price hugs one of the two bands and crawls along the band, we have a case for a strong trending market.
In the chart below we’ve highlighted small retracements while the price hugs the upper Keltner band. Notice that the price retrace to the area around the 20-EMA. It won’t give you an exact price, but a price zone from where the price can potentially bounce and the bullish trend can resume.
This remains a good way to measure pullbacks in price. Successful trading doesn’t require catching the exact turning point.
For a better timing of our trades we can use the Stochastic RSI indicator in combination with the Keltner indicator for more confluence.
The trade trigger is simply to follow with this Keltner Channel pullback strategy. Pull the trigger when the price retraces to the middle band and the stochastic indicator develops a crossover from an oversold territory.
