There are many things that traders need to look out for when trading the forex markets. Traders need to answer several questions before making a trade decision.
Where is the trend going? How volatile is the market? Is price overbought or oversold? Is there momentum behind a price movement? Is the market contracting or expanding?
There are so many things that traders need to consider, and it often causes confusion for those who are not used to it. Luckily, we have the Keltner Channel indicator.
Keltner Channel Indicator
The Keltner Channel indicator is a unique indicator because it gives traders all the information they need in order to make sound trade decisions. It is based on a moving average so it could identify trend direction. It also has an element of the Average True Range (ATR) which allows it to show the volatility of the market. Because it is a channel type of indicator, it could also mark the areas which could be considered overbought or oversold. It could also identify strong momentum using the outer bands of the indicator. Because it could identify volatility and trend altogether, it could also indicate signs of a contracting or expanding market condition. Truly, the Keltner Channel is one of the most versatile technical indicators available to most traders.
The Keltner Channel is composed of three lines. The middle line is basically an Exponential Moving Average (EMA) set at 20 periods. The two lines enveloping the middle line are derived from the 20 EMA and the ATR. The upper line is plotted two ATRs above the 20 EMA line, while the lower line is plotted two ATRs below the 20 EMA line.
The Keltner Channel is an excellent indicator to use for momentum strategies. The combination of the use of the ATR and the 20 EMA allows traders to identify momentum and trend quite effectively.
The Trading Strategy
To trade this strategy, traders should identify strong price breakouts closing outside of the channel coming from a contraction phase. In a bullish momentum, price should close strongly above the upper band. In a bearish momentum, price should close strongly below the lower band.
As soon as price starts its strong momentum price movement, price would tend to stay close towards the outer bands. Trades are held until the trend has fizzled out which is marked by a contracting market phase and price closing in the middle of the channel.
Indicators:
- Kelnter_Chanel (default setting)
Preferred Time Frames: 15-minute, 30-minute, 1-hour, 4-hour and daily charts
Currency Pairs: major and minor pairs
Trading Sessions: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- The market should be in a contraction phase characterized by small indecisive candles.
- A bullish momentum candle should close above the upper line of the Keltner Channel.
- The Keltner Channel should start to expand.
- Enter a buy order on the confirmation of these conditions.
Stop Loss
- Set the stop loss a few pips below the midline of the Keltner Channel.
Exit
- Close the trade as soon as price closes below the midline of the Keltner Channel.
Sell Trade Setup
Entry
- The market should be in a contraction phase characterized by small indecisive candles.
- A bearish momentum candle should close below the lower line of the Keltner Channel.
- The Keltner Channel should start to expand.
- Enter a sell order on the confirmation of these conditions.
Stop Loss
- Set the stop loss a few pips above the midline of the Keltner Channel.
Exit
- Close the trade as soon as price closes above the midline of the Keltner Channel.
Conclusion
Momentum breakout trading strategies are one of the best types of trading strategies and using channel and envelope types of indicators are good for such type of strategies.
It allows traders to identify the contraction phase, the sudden influx of volume indicated by a momentum candle, and the continuation of the trend as price hugs the outer lines where the breakout occurred.
Although momentum breakout strategies and the Keltner Channel is an excellent fit, it is also a good idea to have other indicators to combine with it as an additional confirmation. Traders should also do some technical analysis, looking at the market cycles of contractions and expansions, the long-term trend, as well as the strength of the breakout.
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