What Is The Keltner Channel & How To Trade With It

The Keltner channel is an indicator used for technical analysis of the forex market and other financial markets such as stocks, indices, commodities, precious metals and energies. The indicator is named after the developer, Chester Keltner. For the first time, the “Keltner channel” was described in the developer’s book from 1960 “How to make money in the markets?”. It has stood the test of time and is still being used by professional traders today.

What is the Keltner Channel indicator?

The Keltner channel consists of three lines. The midline is an exponential moving average, usually set to 10 periods. The upper and lower lines are derivatives of ЕМА and values ​​of the average true range indicator. Together, the three lines form the so-called price envelope. Keltner created a truly unique and noteworthy technical indicator for traders, combining two so different EMA and average true range. The Keltner channel is very similar to the moving average envelopes in terms of both appearance and usage.

The Keltner channel indicator can be applied to any financial market, including the forex market. The trading principles for this technical indicator are clear and simple. It can be used for trend trading and trading reversal in a ranging market. If prices are outside the channels, then there is a trend, and it is quite strong, if inside it is most likely not a trend or it is very weak.

Keltner channel indicator
Keltner channel indicator

Adding the Keltner Channel to MT4/MT5

The Keltner channel indicator is not part of standard versions of the MT4 and MT5 trading platforms. You can download the Keltner channel for free by doing a quick google search. To add the indicator to your MetaTrader platform, you need to copy the indicator files to the appropriate directory on your computer.

If you have MetaTrader 4:

Open C: \ Program Files. Next, find the folder of the trading terminal files there and open it. Go to the directory … \ MQL4 \ Indicators and copy the file/files of the Keltner channel there (Keltner channel).

If you have MetaTrader 5:

Open C: \ Program Files. Next, find the folder of the trading terminal files there and open it. Go to the directory … \ MQL5 \ Indicators \ Examples and copy the Keltner Channel file (s) (Keltner Channel).

After that, launch the trading terminal. Click on navigation. A list of indicators opens. Choose the Keltner channel and attach it to your charts.

Keltner Channel settings

You can change the Keltner channel period to a value that fits within your trading strategy from within the inputs window. The lower the periods that you set, the more sensitive the indicator will be to price fluctuations.

Keltner channel inputs window
Keltner channel inputs window

How to trade with the Keltner Channel indicator?

Some traders use the Keltner channel as indicators of market volatility. If you look at the indicator from this position, then you could interpret the situation as follows:

  • When prices are inside the channels, volatility is low.
  • When prices are outside the borders, volatility is correspondingly high.
Volatility identification with Keltner channel
Volatility identification with Keltner channel

Moreover, if prices for a short period reach different borders in turn, then with a 90% probability, the market will have very high volatility, with an uncertain price movement direction.

Typically, prices behave this way during the time of important news releases. The most experienced traders recommend that beginners should not trade in such periods, as news trading can incur very high volatility. Not only due to the large amplitude of fluctuations, but also because spread sizes and execution time of orders often increase significantly during such periods. This can have a signficant impact on your forex trading strategies. In any case, I would always prefer to use an ECN forex broker for the lowest possible spreads and reliable trade execution speeds.

Keltner Channel trading strategy

You can build many trading strategies using the Keltner channel because, in essence, it is a standard channel. If you use the indicator with standard settings, that is, with a short period, you can trade reversals outside the channel in a ranging market and breakout of the channel in a trending market. We could also enter into trends on a pull-back on the opposite side of a channel.

An example of a simple trading strategy implementing the Keltner channel:

For a buy setup:

  • The price should close above the upper border of the channel;
  • We can buy the asset at the opening of the next candle;
  • Set Stop-loss 3-5 points below the local low;
  • Close the trade when the price closes under the midline of the channel.
Keltner channel buy signal
Keltner channel buy signal

For a selling trade, the reverse is true:

  • The price should close below the lower border of the channel;
  • We can sell the asset at the opening of the next candle;
  • Set Stop-loss 3-5 points above the local high;
  • Close the trade when the price closes under the midline of the channel.
Keltner channel sell signal
Keltner channel sell signal

Keltner Channel conclusion

Keep in mind, there are no forex indicators that are flawless. The Keltner channel, like any others, needs confirmation of its signals. While creating your trading system, it is common place to use multipe combinations of market analysis. It is also important to use sensible money managmenet. I would personally only take trades that have a risk to reward ratio of at least 1:3 and never risk more than I can afford to lose.

The Keltner channel is flexible to differing market conditions, thus can be used as part of a forex trend trading strategy and forex range trading strategy. However, notice that the Keltner channel may lag like any other statistical indicator.

The methods of implementing the Keltner channel into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Keltner channel indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!