How to master the Keltner channel indicator with MT4

Keltner channel indicator

You'll find that a lot of popular trading strategies revolve around dynamic channel indicators.

Dynamic bands – also known as channels or envelopes – are a great example of such dynamic trading indicators.

The core idea is simple. Even better, it's effective.

Before we delve deeper into the subject, let us explain the basic premise behind the Keltner Channels.

What is the Keltner Channel?

The indicator named by Chester W. Keltner is a volatility based envelope that measures price movements in relation to lower and upper moving average bands. Chester Keltner was a commodity trader, who first outlined the theory in the 1960s.

A volatility channel, or envelope, places the bands in such a way that it also serves as a measure of a Forex currency pair or stock volatility. Keltner Channels are a combination of an exponential moving average and the Average True Range indicator.

The theory behind the Keltner Channel in a nutshell is:

  1. We need to plot the bands a certain distance away from an average of the market price;
  2. The bands are far enough away from each other that they represent a significant market move;
  3. If the market moves through those bands, there is an above-average chance that we may see prices continue to trend in that direction.

Variations tend to revolve around the specifics of where you place the bands. The basic calculation is:

  1. Middle Line: 20-day exponential moving average
  2. Upper Channel Line: 20-day EMA + (2 x ATR(10))
  3. Lower Channel Line: 20-day EMA - (2 x ATR(10)

Keltner Channels are less known than Bollinger Bands®, but they were conceived much earlier. In fact, Keltner Channels work just as effectively as any other volatility channel.

This article will discuss how Keltner Channels work and how to use them in MetaTrader 4 as we are proud to present probably the best Keltner Channel indicator on the market – Admiral Keltner that is available in our MT4 Supreme Edition.

Trading with Forex Keltner Channels

We can very broadly divide traders into two camps:

  1. Trend followers,
  2. Counter-trenders.

Basically, both parties want to know if the market is stuck in a range or if it is trending. Usually, the price will either:

  1. break out and form a new trend;
  2. fail to break out and bounce back from where it came.

It means you can use the Keltner Channel indicator to easily see levels offering good trading opportunities. For that reason, the indicator shows three channel lines – upper, lower, and central. The upper and lower lines help us eyeball potential breakouts, while the centreline serves as a median point.

Downloading the Keltner Channel Indicator with MetaTrader 4

MetaTrader 4 comes with a comprehensive selection of built-in indicators, but this is just the tip of an iceberg. There a huge number of custom indicators that you can potentially use, which are developed by users within the vast MT4 community.

The Admiral Keltner indicator is an improved version over the existing, standard Keltner indicator. You can download it easily as it is a part of the award-winning MT4 Supreme Edition. Once you download the indicator, this is how you place it on any chart you want.

Source: GBP/USD H4 Chart, Aug 14, 2017, Admiral Markets Platform

The Keltner Channel download will appear on your indicator list the next time you restart your MetaTrader 4.

Download MT4 Supreme Edition

Admiral Keltner Settings

Admiral Keltner Settings

Source: Admiral Keltner Indicator, Admiral Markets Platform

These are the default Keltner Channel settings. The moving average type is EMA (Exponential Moving Average), and the rest of the available settings here is what differs Admiral Keltner from other Keltner Channels indicators on the market. For most of the volatility band strategies, you should be using the formulation that features Average True Range; also, the centreline is the 20-period exponential moving average, which quite a few Keltner indicators fail to show.

The EMA period can be set to anything you need. For day trading, usually 15 to 40 EMA is typical. The multiplier can be adjusted based on the market you are trading. While 2.0 is a common setting, you may find that 1.6 or 2.4 provide you with better information for the exact market you trade. Have in mind that the higher the multiplier, the wider the channel and vice versa. The smaller the multiplier, the narrower the channel.

EMA period on Keltner channel

Source: GBP/USD H4 Chart, Aug 14, 2017, Admiral Markets Platform

Basic Trading with Admiral Keltner Channels

Breakout strategies use volatility channels in a very simple manner. This tends to be:

  1. buy breakouts above the upper volatility channel,
  2. sell breakouts below the lower volatility channel.

The middle band is used as the stop-loss. Profit targets are defined by Admiral Pivot that should be set to H1 or D1 time frame. Breakouts are usually traded on M15 timeframe. Keep in mind that Admiral Pivot is also a standard MT4SE indicator.

Custom Indicator - Admiral Pivot

Source: Admiral Keltner Indicator, Admiral Markets Platform

The chart below shows possible entries based on a candle close above or below the Admiral Keltner indicator. Due to potential false breakouts, the best option is to use breakouts with an additional filters, such as the Stochastic, MACD, CCI, or RSI.

GBP/USD M15 Chart, Aug 9-14, 2017, Admiral Markets Platform, Admiral Pivot (D1)

Source: GBP/USD M15 Chart, Aug 9-14, 2017, Admiral Markets Platform, Admiral Pivot (D1)

Scalping Trading Strategy with the Admiral Keltner Indicator

Let's now have a look at the advanced Forex scalping strategy that should be traded on 1-minute timeframes. The strategy is suitable for extreme scalpers and for traders who enjoy the excitement of day trading volatility on extremely short-time frames.

Time Frame: M1

Indicators:

  1. Admiral Keltner (22,10,1.0)
  2. Admiral Pivot (M15)
  3. EMA 445 set on close (Red)
  4. EMA 89 set on close (Green)
  5. MACD (5,34,5) and MACD (25,170,25)

Pairs to trade:

  1. EUR/USD
  2. GBP/USD
  3. USD/CHF
  4. AUD/USD
  5. EUR/JPY
  6. GBP/JPY

GBP/USD M1 Chart, Aug 14, 2017, Admiral Markets Platform, Admiral Pivot (H1)

Source: GBP/USD M1 Chart, Aug 14, 2017, Admiral Markets Platform, Admiral Pivot (H1)

Buy trade:

  1. Green EMA above Red EMA;
  2. Both MACDs above the 0 line (histograms are pointed up);
  3. The candle needs to touch or come very close to either Green or Red EMA, then bounce;
  4. The price needs to close above the Keltner Channel.

EUR/JPY M1 Chart, Aug 14, 2017, Admiral Markets Platform

Source: EUR/JPY M1 Chart, Aug 14, 2017, Admiral Markets Platform

Sell trade:

  1. Green EMA below Red EMA;
  2. Both MACDs below the 0 line (histograms are pointed down);
  3. The candle needs to touch or come very close to either Green or Red EMA then bounce;
  4. The price needs to close below the Keltner Channel.

AUD/USD M1 Chart, Aug 14, 2017, Admiral Markets Platform

Source: AUD/USD M1 Chart, Aug 14, 2017, Admiral Markets Platform

Stop-Loss and Targets:

Stop-loss is placed 15 pips + the spread. The target is 5-15 pips, or Admiral Pivot set to M15.

GBP/JPY M1 Chart, Aug 14, 2017, Admiral Markets Platform

Source: GBP/JPY M1 Chart, Aug 14, 2017, Admiral Markets Platform

Tips for Using Keltner Channels

  1. Use a backup or confirming indicator in order to avoid false signals.
  2. Use one leading and one lagging indicator
  3. They should agree with each other no matter what.
  4. Don't use Keltner Channels with another volatility breakout indicator, except for Bollinger Bands ®.
  5. The Bollinger Bands ® with Admiral Keltner Breakout Strategy is another good strategy.
  6. Start by experimenting with what combination works best for you on a Demo Trading Account for this purpose.

Other Volatility Based Indicators

Other similar indicators to Keltner Channels are:

  1. The Average True Range (ATR Indicator) that is another excellent tool for price range projections;
  2. The Bollinger Band ® that is one of the better-known volatility channel methods;
  3. Take a look at our guide on the Donchian Channel indicator.

Feel free to browse our rundown of the most important Forex indicators or go ahead and test them risk-free on our Demo Account.

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