What Are Keltner Channels and How Do You Trade With Them?

Keltner channels are a form of technical analysis that have been found to be quite useful. What is a keltner channel? It’s a volatility based indicator found in stock trading that’s composed of three separate lines. They use the average true range (ATR) instead of standard deviation with bollinger bands. Bollinger bands are also a great momentum tool that can be used to scalp.

What Are Keltner Channels & How to Trade Them?

  • Keltner channels are volatility based envelopes that are below and above ema’s or exponential moving average lines. Instead of using the standard deviation with Bollinger Bands, they use the ATR or Average True Range.

If you have been following this blog so far, you may have figured out by now that I get my writing topics from the things we discuss in the Bullish Bears Day Trading Room. ​

Trading the market these days requires adapting to new situations and finding new trading strategies. Typically these are different than market strategies used in the past. In the chat room during one strong surge in the market, the $SPY broke out and a trader suggested they would like to find an entry during the next pull-back.

Pullback

Common intraday tactics are to find a ticker that is presenting momentum in the analysis. Then wait for a pullback and pull the trigger. These are not common trading days.

As a result, in strong accumulation days, a very liquid ticker like $SPY can run wide open all the way to the next level of resistance; only to turn around and fall back all the way to support again as the surge momentum is played out

​the trader who suggested waiting for an entry was not wrong. In fact, I commend them for not ‘chasing’ a trade. It’s important to realize that current market conditions suggest a different strategy be developed to take advantage of these surges.

There are a lot of different trade strategies to deal with different markets. In fact one strategy, which has always been a favorite of mine, happens to have some basic characteristics which I have adapted to use in these situations.

What Is the Difference Between Bollinger Bands and Keltner Channels?

  • Here are the differences between bollinger bands and keltner channels:
  • Keltner channels show volatility using high & low prices
  • Bollinger bands use standard deviation
  • They both show important support and resistance levels

Price Headly has a daily market trade strategy that utilizes the bollinger bands study with the acceleration bands study to identify a ticker with such momentum that the price breaks outside of the acceleration bands.

The move is so strong and sudden that the bollinger bands follow the price outside the acceleration bands. In the strategy, his trade concept was that a strongly trending stock with that much momentum will continue to trend.

Otherwise it will quickly lose its momentum and fall back inside the acceleration bands study. Thus offering the trader a simple trade strategy with nicely identified stop loss criteria.

Modify

​If we modify this strategy for intraday trading, we can perhaps identify trade set-ups that present momentum. Then they will have a clearly defined stop loss to take advantage of these market surges. You won’t need be so worried about jumping into a trade that no longer has the momentum to continue higher. Our criteria are simple:

  • Identify when a trending stock still has momentum to allow a ‘late’ trader an opportunity to participate in the rally while still utilizing a respectable stop loss plan.

Activate and utilize an indicator or study that works, is respected by the trading community, and can be used by traders from all skill levels.

Keltner Channels

Breakdown of Keltner Channels

Keltner Channel

Allow me the opportunity to present the Keltner Channels. I believe that anyone can look back after the day is done and point out some great entries and exits. However, let’s take the time now to examine these three trade set-ups. I believe that this analysis may offer some perspective.

​Here we are right after the bell, and the price has consistently closed outside the keltner channels top band. I do not trade the open bell very often. I do not recommend that anyone ever trade the open range (OR) without a very clear grasp of trading the open.

Set that aside. The price may be closing outside of the keltner channels top band. However, the price is OPENING inside the keltner channel. This keeps me out of the trade. Let’s see where this goes.

There was plenty of momentum at the open bell. The channels offer a perspective on just how strong that momentum was. There are other things we could add to the analysis to take the trade or not.

However, the channels alone would NOT have offered a trade opportunity here where the orange range line is located.

Keltner Channels

If other analysis could be performed with additional studies (volume, VWAP, fibonacci levels, other areas of support or resistance). Then perhaps a different choice would be made; BUT we are still within the O.R. and we are performing analysis with only candles and the Keltner Channels.

Keltner Channel

How to Trade Keltner Channels

  • The first opportunity to take a trade came when price bounced off the lower Keltner Channel Band and struggled through the middle Keltner Channel resistance. This was a clearly defined momentum run with a nice stop loss at the lower band. There are two ways to consider an exit with the keltner channel bands. Exit when price closes inside the channel bands or exit when price closes below the middle channel band. While there are numerous ways to develop an exit strategy, we are focused here with using the candles and the channels.
Bollinger Bands

​Again, we are presented with the pattern to define the trade entry. Price bounces off the lower band and penetrates the middle keltner channel. A candle close above the middle line is the confirmation for entry. The stop loss again is clearly defined by the lower channel band.

Why Trade the Keltner Channel?

The examples have clearly shown that the keltner channel study offers a trader an opportunity to enter a trade even after the ticker has begun to run; along with a clearly defined stop loss.

While I did not cover the exit strategy in detail, the keltner channel study does offer some hard rule options for an exit. When combined with other indicators, this keltner study could be the momentum measurement you’ve been looking for.

Bollinger Bands

ThinkorSwim: Keltner Channels

​We need to modify the thinkorswim keltner channel study to give us some type of indication when our strategy is setting up. We need to develop a scanner to identify stocks with these set-ups.

Looking for more stock training? Take our free stock trading courses to help you get started.

Bollinger Bands

These are the labels and the colors used for the thinkorswim study that I developed to go with the keltner strategy discussed today. When the candle close is outside of the outer keltner channel band, a green label will pop up in the upper right corner of the screen and say “Keltner POP”.

Then when the candle crosses through the top of the outer band and closes inside the channel, you will see a pink label that says “Keltner FADE”. When the candle crosses below the keltner lower band, you will see a red label that says “Keltner Failure”.

​When the candle crosses through the lower band and closes inside the keltner bands you will see a label that says “Keltner Recovery”. At all other times you will not see any labels from this indicator.

If the candle passes through the center line of the channels you will hear an alert and a message is sent to the thinkorswim message center.

When you open the ‘Edit Studies” tab in the thinkorswim platform, you may see a white circle with a black (?) inside it to the right side of a study. When you click on that circle there is a hint which should tell you about the study selected.

Keltner Channels

​Keltner Study with Alerts & Labels: http://tos.mx/E49yDx                                                                                                              Keltner Stock Scanner Template: http://tos.mx/1l8Fxs

Keltner Channels

​The Stock Scanner Template has been coded to look for a candle crossing through the middle keltner channel line (in the up direction or the down direction) within 3 bars. This scanner is just the template. Price of stocks, float size, or other scanner criteria has not been defined.

Final Thoughts

Keltner channels can be a great tool for finding entries and exits during a momentum move. Many times we wait for a pullback. Chasing should be avoided at all costs. As a result, the keltner channel may help you to find an entry in a run.

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