![]() ![]() If the market closes above the upper Keltner band, that could be a signal that the market has started a more significant upward phase. With a trend following strategy, the upper and lower bands of the Keltner Channels basically work as breakout levels. Still, Keltner channels work with trend following strategies as well. Trend following could be said to be the opposite of mean reversion. If the close is higher than the moving average, you are in a rising market, and vice versa. One of the most common ways of determining the long term trend of the market is to use the 200-day moving average. A falling market will typically have deeper dips before it turns around than a rising market. You may also want to take the market phase into consideration. If used together with Keltner Bands, it could help with filtering out bad trades by waiting for the RSI to show oversold readings. The RSI indicator, for example, is widely used to identify oversold and overbought conditions. In most cases, you do this best by adding more filters. While failed trades will be the reality of any trading strategy, you probably want to prevent as many false signals as possible. Below you see an example of a mean reversion trade:Īs you can see, the market overextended itself by entering oversold territory and reverted back to its mean shortly thereafter. Mean reversion is the tendency of some markets to revert once they has moved excessively, often too quickly in one direction. In Mean ReversionĪs briefly stated above, Keltner Channels could work very well in a mean reversion strategy. You can use Keltner Channels in a variety of ways, and below we have chosen to list the most common approaches. The lower Band is the 20-day EMA – (2 x ATR(10)) The Upper band is the 20-day EMA + (2 x ATR(10)) Here is how you calculate Keltner Channels: Instead, you might want to act on a breakout from the Keltner Channel, since that resonates better with the character of that market. If you were to apply a mean reversion with Keltner Channels on such a market, that probably not work too well. For example, the energy markets tend to be trend following. The very same thing applies to different markets as well. However, if you changed the timeframe to 5 minutes, the chances are that that very strategy would fall apart. Therefore, signals issued from a breach of one of the Keltner bands could mean different things depending on what market and timeframe you tradeįor example, a mean reversion trading strategy with Keltner Channels would work very well on stocks on a daily timeframe. Some markets have an inherent tendency to revert to the mean, while others are more of the trending sort. What a market will do once it is in overbought or oversold territory varies. However, it is lagging which means that a very quick or overextended move tends to result in the security breaking one of the lines. The Keltner Channels will always adapt to the current direction of the security and the current volatility level. Or in other terminology, that it is overbought or oversold. Since Keltner Channels and other price channels strive to cover most of the price movements, a security trading above or below one of the channels indicates that the security has overextended itself in a short period of time. ![]() Some Price channels use the x-period high and low to set the upper and lower band, which for example is the case with the Donchian Channel. However, there are other methods of calculating the centerline. Many price channels, like the Keltner Bands and Bollinger Bands, use a moving average to form the base of the price channel. The general idea behind price channels is to identify a channel where the security is most likely to trade. The new version, just like the Bollinger bands used a volatility based measure ( ATR) to calculate the channel width. In the 1980s, Linda Raschke introduced an updated version of the Keltner Channels. Take a 10-day simple moving average (SMA) of the typical price, which is the average of the High, the low and the Close price.Īdd and subtract the 10-day SMA of the High-Low, which basically becomes a range calculation, to form the upper and lower channel lines. In that book he presented the “Ten-Day Moving Average Trading Rule” which was the following: The first version of the Keltner Channels was introduced in the 1960 book “ How to Make Money in Commodities” by Chester Keltner. ![]()
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