Keltner channel is a trend following indicator.
Being a trend following indicator,Keltner channel indicator was created by Chester .W. Keltner with the main objective of helping traders to know whether the market is trending upwards or in a downward direction.Just like in other trend following indicators,keltner channel is based on support and resistance.Keltner channel is further considered to be similar to bollinger band and donchian channels on the fact that it is also used to identify the volatility of the market.
Just like in bollinger band, keltner channel also has 3 bands, the upper band, the middle band and the lower band.The upper band represent the highest high while the lower band represent the lowest low.
According to Chester Keltner,its value is derived using the average true range as follows;
upper keltner channel = n-period exponential moving average + average true range multipliers
lower keltner channel= n-period exponential moving average- average true range multipliers
middle keltner channel = n-period exponential moving average
Therefore, since keltner channel has upper band and lower band, it therefore follows that when the prices are above the upper band(keltner) that will be an indication that the market is trending upwards thus the trader should be trading in an upward market direction. If the price rises above the highest high of the upper keltner ,the market will experience a downward reversal thus signaling the trader to exit any buy position and enter a sell position.On the other hand, if the prices are below the lower keltner, that will be an indication that the market is trending downwards thus the trader should be trading in a downwards market direction.If the price falls below the lowest low of the lower keltner, the market will reverse upwards thus signaling the trader to exit any sell position and enter a buy position. This is indicated as from the candle sticks chart below;
From the candle sticks above, there are 5 points, point A,B,C,D and E. Point A and C represent the resistance and support point while point B is the upper keltner. Point D is the lower keltner while point E is the middle keltner.At point A the price has risen above the highest high of the upper keltner thus an indication of a resistance point over there. This will result to a downward market reversal thus signaling the trader to exit any buy position and open a sell position since the market is starting a downward trend as well as the prices are starting to move below the lower keltner as indicated.On the other hand, at point C the price has fallen below the lowest low of the lower keltner thus an indication of a support point over there.This will result to an upward market reversal thus signaling the trader to exit any sell position and open a buy position since the market is starting an upward trend as well as the prices are starting to move above the keltner as indicated.
Recommendation : If you are a day trader just use 1 min, 5 min, 15 min and 30 min timeframe while if you are a swing trader just use 1 hour and above timeframe if you want keltner channel indicator to work well for you
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