Summary - The Keltner Strategy
Keltner Channels is an indicator that measures volatility in the market. The original Keltner Channels were described by trader Chester Keltner in a book from 1960. Since then, the indicator has been modernized, so today it reminds of the indicator Bollinger Bands ©, something more known.
Keltner Channels is made up of three lines: a center line and an upper and lower line, which most often encapsulate the course graph. The midline is just an exponentially moving average, which tells whether the price is traded above or below the average of the period. The two outer lines indicate the volatility of the paper using the so-called Average True Range, also called ATR. To understand ATR, I will refer to this article: https://en.wikipedia.org/wiki/Average_true_range
It is exactly by ATR that Keltner channels differ from Bollinger bands, as Bollinger instead uses the so-called "standard deviation" to define the bands. The deviation indicates the difference between the share closing price and the share price of the share over a period.
For both Bolinger bands and Keltner Channels the bands are narrow when there is little volatility in the stock, whereas the bands are spread apart if there is high volatility in the market.
As a trader, you can use Keltner channels to assess the trend in one share. If the course breaks up over the upper band, one can expect a strong uptrend going on. However, breaking the course, under the lower band can be expected to have a strong downturn.
If the market is not in a trend, one can expect the course to move within the upper and lower bands.
Keltner channels added in the price of oil. As can you can see from the graph, the price is above the top Keltner line in mid-April. It indicates that an uptrend is currently happening. In early July, the price falls below the bottom line, indicating that a downturn is on its way.
Strategy using Keltner channels
Keltner channels are one of the indicators that I use to get an idea of the market trend. However, it will always be in conjunction with other elements, such as price developments the previous day, and price developments in the short term.
An example of how to act is described below. Keltner channels work well to find an entry in a trending market, and it is in this context that we ourselves use it. You can use Bollinger bands in the same way. Both indicators provide a good framework for the range in which the price will normally be. If the price "dots hole" at the top or bottom of a Keltner channel, you can often see it as a sign that you can expect later that the price will move even further in this direction. However, as mentioned above, this should be combined with other factors in order to become a real trading strategy.
I have used the following strategy to trade the German DAX index on a 5-minute graph:
First of all, one must create an idea of where the market is overall on its way. Even though we usually take our trades in the DAX index on a five-minute graph, we first look at the slightly longer trends of a 1-hour graph and a day graph and enter the main support and resistance points. Before the market opens in the morning at. 9 we also conduct an analysis of what has happened after the closure of the market at. 17.30 the day before and what has happened in the Asian market. For example, you can check here: Yahoo Finance Asia
If the Asian market is either very negative or very positive, it can increase the likelihood that European markets will continue in this direction. However, you should be aware that even in strong trends, dust is coming in the opposite direction, and it is not unusual for the DAX index to start correcting 30-50 points upwards (or more) even if you are in the middle in a nice downturn.
We also determine yesterday's price range in the period between kl. 9 and 17.30 to analyze how positive or negative the market is. The most clear scenario occurs when there is an "extreme gap" up or down - that is, the market opens either higher or lower than it has been at any time the day before. See an example of this below.
On this screenshot the price range is between kl. 9 and 17.30 drawn with two black lines, and the black arrow marks where the market opens the day after. 9. This price is lower than it has been the day before and thus there is an increased likelihood that the market is negative and during the day will continue further down. This is called an "extreme gap" downward.
The reason why this is not always as easy to act as it may seem is that it can be difficult to predict exactly when the market will go further down. Quite often, there will be a correction of some size upwards, for example, to the bottom of yesterday's price range before the market continues.
Once you have made some general thoughts about where the market is going, you can zoom in and use Keltner channels to get a further confirmation. Below is an example of how the market performed on 5 July after an extreme gap had occurred. We are zoomed in on a 5-minute graph and shortly after the opening of the market at. 9 prize prize hole at the bottom of the Keltner Canal, which we can see as another confirmation that the market will go downwards. Here it is important not to get too excited, as you typically find yourself in a position where a hole can be hollowed on the channel. So, so we wait for the price to rise against the middle band in the channel, which is an exponentially moving average, and when the price is around and afterwards makes signs down and forming a red bar, we have the opportunity to go short.
In case the price goes up and shape one nice green bar after another, you will not go short. It is expected that the hypothesis that the market will go downwards is confirmed. As you can see in one day, there may be quite a few signals where the price first dots on the channel, then reaches the moving average, stops, and moves downwards. It is far from always that you see so many good signals on a single day as in the example below. As a rule, it will be the first two to three signals in the same direction, which are the most valid. Then you can risk that there is no more fuel in the trend.
Conclusion
This strategy works good as a tool for entering the market, which has a nice trend, and can thus be well described as a trend-following strategy. Are you in a period when the market moves more sideways on the day graph, and possibly. Located in a narrow price range, it will not work as well. You should also do not trade it on days when big news comes out later in the day, for example. when Janet Yellen, Director of the US Central Bank, speaks later in the day or evening. These days, the market tends to move so much, and therefore you can not regard it as a valid signal that the Keltner channel is dotted.
In this example, I have used default settings for Keltner channels, an EMA period of 20, an ATR multiplier of 2, and an ATR period of 10.