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Trading on Cryptocurrency Bitcoin/Etherium with Keltner Channel

 

Keltner Channels are volatility-based envelopes set above and below an exponential moving average. This indicator is similar to Bollinger Bands, which use the standard deviation to set the bands. Instead of using the standard deviation, Keltner Channels use the Average True Range (ATR) to set channel distance. The channels are typically set two Average True Range values above and below the 20-day EMA. The exponential moving average dictates direction and the Average True Range sets channel width. Keltner Channels are a trend following indicator used to identify reversals with channel breakouts and channel direction. Channels can also be used to identify overbought and oversold levels when the trend is flat.

 

In his 1960 book, How to Make Money in Commodities, Chester Keltner introduced the “Ten-Day Moving Average Trading Rule,” which is credited as the original version of Keltner Channels. This original version started with a 10-day SMA of the typical price {(H+L+C)/3)} as the centerline. The 10-day SMA of the High-Low range was added and subtracted to set the upper and lower channel lines. Linda Bradford Raschke introduced the newer version of Keltner Channels in the 1980s. Like Bollinger Bands, this new version used a volatility based indicator, Average True Range (ATR), to set channel width. StockCharts.com uses this newer version of Keltner Channels.

 

There are three steps to calculating Keltner Channels. First, select the length for the exponential moving average. Second, choose the time periods for the Average True Range (ATR). Third, choose the multiplier for the Average True Range.

Middle Line: 20-day exponential moving average

Upper Channel Line: 20-day EMA + (2 x ATR(10))

Lower Channel Line: 20-day EMA – (2 x ATR(10))

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Because moving averages lag price, a longer moving average will have more lag and a shorter moving average will have less lag. ATR is the basic volatility setting. Short timeframes, such as 10, produce a more volatile ATR that fluctuates as 10-period volatility ebbs and flows. Longer timeframes, such a 100, smooth these fluctuations to produce a more constant ATR reading. The multiplier has the most effect on the channel width. Simply changing from 2 to 1 will cut channel width in half. Increasing from 2 to 3 will increase channel width by 50%.

 

The Keltner Channel trading strategy uses a volatility based trading indicator to allow us to trade markets that are showing some decent price movement.

Indicators are derivative of price meaning that the results that you see via a trading indicator will come via a calculation using the price you see on your chart.  This is a long-winded way of saying that all trading indicators including the Keltner Channel, is going to lag actual price movement.

 

Price first.

Indicator second.

 

Channels can make for a good trading strategy because they cannot only show what “normal price movement” should be but also when a price event happens outside the normal behavior of price.

 

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