Keltner Channel Strategy: How to use it in trading

The Keltner Channel strategy is nothing new. However, many Forex trading beginners have been using it recently as an alternative to the more popular Barometer strategy. The Keltner Channel strategy uses three moving averages to indicate the direction of the market. When combined with the Channel indicator, this is said to provide a sign of: 

  • Support;
  • Resistance for a particular currency.
keltner channel strategy

Keltner channel description

The Keltner Channel strategy is very easy to understand. For example, when looking at a long term chart of the EUR/USD pair, you would see a series of vertical bars. On this same page you would also see the same series of bars with different color-coded levels. 

This means that these levels represent the three different moving averages on which the investors make their decisions about the currencies to trade. As the levels move, they signal to investors whether or not the EUR/USD is expected to: 

  • Go up; 
  • Stay the same;
  • Fall down in value. 

When traders decide to enter or exit the forex market, they use the signals given by the channels.

Technical analysis technique

The keltner channel strategy works on the same basis as the Bollinger Bands used in Forex trading. In fact, both are based on the same technical analysis technique where an upward or downward movement is detected by the channel. However, the channel takes on a more complex appearance when it is combined with the Bollinger Bands. These combine the channel with a combination of indicators like the: 

  • Stochastics; 
  • Moving Average Convergence/Divergence. 

These combine to give a signal to investors when to buy or sell a particular currency.

Why is it so popular?

There are many people who use the keltner channel strategy to trade the forex market. This is because the strategy has been proven to be quite successful. It has been developed in conjunction with the Bollinger Bands strategy that was developed to help currency trading dealers detect currency price trends. Both the system short positions and long positions are combined with the use of varying levels of Bollinger bands to signal when to buy or sell.

When the trend continues upward, this means that the currency prices will continue to rise. At this point, the trader will want to buy, so he will add currency to his short positions. When the price action breaks down, this means that the trader will want to sell off the currency he is holding in his long positions. Thus, when the trend continues upward with the breaking of the resistance, this means that the prices will continue to move upwards.

Middle line

This is basically how the strategy works. When the middle line is broken, the platform will draw a line between the top and the bottom of the previous day’s high and low. The middle line is the upper limit of: 

  • Support; 
  • Resistance. 

The key to this trading strategy is the fact that it is based on a simple moving average, or SMA, which is determined by moving averages of closing prices over a period of time.

SMA

The SMA is considered as one of the more reliable indicators when determining where a currency will go. There are two types of this trading strategy: 

  • Top line;
  • Bottom line. 

The former uses the upper and lower channels as resistance levels while the latter uses the envelope based technical indicators. These indicators are used in place of the traditional technical analysis methodologies that are often seen in forex trading. Some of these techniques include: 

  • Support and resistance levels; 
  • Oscillators; 
  • Fibonacci levels; 
  • Other formations.

MT4 importance

The MT4 indicator uses the moving average of the price in a channel that spans the range between two points. Traders use this channel as a means to support their positions while eliminating those that may be risky. The best thing about using this particular channel is that it can be updated rapidly and easily using a software program. While it has been claimed that this strategy provides positive results, it has also been said that some of its indicators are not very accurate. It is important for traders to understand that accuracy cannot be achieved with accuracy.

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