[Trading Crypto with Keltner Channels] - Crypto Academy / S5W6 - Homework Post for professor @fredquantum.
Question 1
Creatively discuss Keltner Channels in your own words.
Keltner Channels
The Keltner Channel indicator is a volatility-based indicator that is comprised of three oscillating lines that indicates the volatility and momentum of a trend through its lines (Upper band, lower band, and EMA), where the EMA is placed at the middle of the upper band and the lower band.
The Keltner Channel indicator was developed and introduced by Chester W. Keltner in the mid 1960s but was revised and improved to suit modern standards of trading in the early 1980s by Linda Raschke.
The Keltner Channel indicator works by representing the volatility of a traded market with the upper and lower bands, which are set to two (2) times the average true range (ATR) above and below the EMA (this can be changed accordingly depending on the trading system and strategy). Ideally, the Keltner Channel indicator identifies the trend with the angle of the indicator and the movement of price, dynamic resistance and support areas, and breakouts.
For instance, in an up-trending market, the trend is identified by the Keltner Channel indicator as the indicator angle will be facing and moving upwards, with price forming consistent higher highs and higher lows. While in a downtrending market, the Keltner Channel indicator angle will be facing and moving downward, with price forming consistent lower highs and lower lows.
Following the above principles, the Keltner channel indicator can confirm the directional movement of price with the formation of upward angles for an uptrend, and downward angles for a downtrend. A break above the upper band signifies a strong movement of price upward, while a break below the lower band indicates a strong movement of price downward.
Question 2
Setup Keltner Channels on a Crypto chart using any preferred charting platform. Explain its settings. (Screenshots required).
Adding Keltner Channel indicator to Chart
To add the Keltner channel indicator to the price chart, visit any price chart platform that supports the use of indicators. For this illustration, I chose Tradingview.
First, visit Tradingview's official website and access the chart section of the platform.
Next, click on indicators or Fx at the top center menu.
Next, search for the Keltner channel indicator using any relevant keyword like Keltner, Keltner channel, etc.
Then click on the indicator search result to add the Keltner channel indicator to the price chart.
The Keltner channel indicator has been added to the price chart, indicating the trend volatility of the asset traded.
Keltner Channel Indicator Settings
To configure the Keltner channel indicator, hover on the indicator name on the top left corner and click on settings.
Inputs Tab
On the appeared inputs tab, the Keltner channel indicator has a default period of 20, a multiplier of 2, and an ATR length of 10. The indicator period settings can be changed to suit the trading system and strategy being used by the trader.
Style Tab
On the Style tab, the Keltner channel indicator curve color, thickness, and precision for the upper bounds, lower bounds, and the EMA, can be changed to suit the desired specifications of the treader.
Keltner Channel Indicator Default Setting
The Keltner channel indicator has a default period observation of 20, a multiplier of 2, and an ATR value of 10, but the best setting depends on the trading system used and the type of asset traded. A short-term trader will use shorter indicator periods, while a long-term trader will use higher indicator settings.
The best setting can be determined through backtesting of the indicator strategy, and also to determine the Keltner channel indicator behavior when combined with other technical indicators like moving average (MA).
Question 3
How are Keltner Channels calculated? Give an illustrative example.
Keltner Channel Indicator Calculation
The Keltner channel indicator has a mathematical expression to represent this concept, and the formula is as follows:
The upper band = EMA + 2 × ATR
The lower band = EMA - 2 × ATR
Middle line = EMA (depending on the observation period selected)
Where:
Multiplier used is 2.
To illustrate how the OBV indicator value is calculated, consider the example below:
An ETHUSDT chart has the following price readings:
EMA period =20
ATR length = 10
Multiplier = 2
The Keltner channel indicator will be calculated thus:
Middle line = 20 since the EMA value is 20.
Upper band = 20 + (2 × 10)
Upper band = 20 + 20
Upper band = 40
Lower band = 20 - (2 × 10)
Lower band = 20 - 20
Lower band = 0
With the above calculation, the upper band will move upward indicating a bullish trend.
Question 4
What's your understanding of Trend confirmation with Keltner Channels in either trend? What does sideways market movement looks like on the Keltner Channels? What should one look out for when combining 200MA with Keltner Channel? Combine a 200MA or any other indicator of choice to validate the trend. (Separate screenshots required)
Trend Confirmation using Keltner channel indicator
The Keltner channel can confirm the trend with the angular position of the indicator three lines (upper and lower bands, and the middle line). I will illustrate the scenarios below:
Trend Confirmation in an uptrend
In an uptrend, the Keltner channel indicator lines (upper band, lower band, middle line) move in an upward angle, as price makes consistent higher highs and lows. Ideally, price formations stay between the upper band and the middle line, where the upper band serves as a resistance, and the middle line serves as the support. To illustrate this, consider the image below:
Observing the above chart, the Keltner channel indicator confirmed the trend with its upward angle movement, and the formation of price staying between the upper band and the middle line for the most part, as the upper band serves as a resistance and the middle line as a support level.
Trend Confirmation in a downtrend
In a downtrend, the Keltner channel indicator lines (upper band, lower band, middle line) move in a downward angle, as price makes consistent lower highs and lows. Ideally, price formations stay between the middle line and the lower band, where the middle line serves as a resistance, and the lower band serves as the support. To illustrate this, consider the image below:
Observing the above chart, the Keltner channel indicator confirmed the trend with its downward angle movement, and the formation of price staying between the middle line and the lower band for the most part, as the middle line serves as a resistance and the lower band as a support level.
Sideways Market and Keltner channel
In a consolidating (sideways) market, price moves within a resistance and support level, until a breakout occurs above or below the resistance or support level. The Keltner channel indicator represents a sideways market with a sideways angle movement, where the upper band serves as a resistance, and the lower band serves as a support. To illustrate this, consider the image below:
Observing the chart, the Keltner channel indicator moved sideways as price maintained a resistance and support level multiple times. Additionally, the Keltner indicator served as dynamic resistance and support levels to price movement as the upper band maintained the resistance and the lower band maintained the support.
Combining 200 MA and Keltner Channel Indicator
The Keltner channel indicator like every other indicator has the tendency of generating false or distorted trade signals. The Keltner channel can be combined with other indicators like moving average (MA) with a higher period to filter out the distorted readings generated. For this illustration, the moving average period used is 200.
Ideally, there are a few things to observe when combining the Keltner channel indicator and the 200 MA, they include the following:
In an Uptrend
In an uptrend, the 200 MA should be below the price and the Keltner channel, while the Keltner channel is moving at an upward angle. This confirms the overall bullish trend bias. To illustrate this, consider the image below:
As seen above, the 200 MA and the Keltner channel confirm the bullish trend respectively.
In a Downtrend
In a downtrend, the 200 MA should be above price and the Keltner channel, while the Keltner channel is moving at a downward angle. This confirms the overall bearish trend bias. To illustrate this, consider the image below:
As seen above, the 200 MA and the Keltner channel confirm the bearish trend respectively.
In a Sideways Market
In a Sideways market, the 200 MA should be within the price and the Keltner channel, this confirms the absence of a trend, as price formation maintains a defined resistance and support levels. To illustrate this, consider the image below:
As observed, the 200 MA and the Keltner channel confirmed the absence of a trend with its movement and formation.
Question 5
What is Dynamic support and resistance? Show clear dynamic support and resistance with Keltner Channels on separate charts. (Screenshots required).
Dynamic Support and Resistance
The price of an asset represented on a price chart moves in either ascending or descending waveform, this creates key price swing points referred to as either support or resistance level. The concept of dynamic support and resistance is derived diagonally as current price development reacts to previous price swing points. Indicators like moving averages, Keltner channel, are generally used in identifying dynamic resistance and support level.
Keltner channel lines (upper band, middle line, and lower band) serve as dynamic support and resistance levels for price development. Ideally, the upper band serves as the dynamic resistance level, while the lower band serves as a dynamic support level. To illustrate this, consider the image below:
Scenario 1 (Uptrend)
The scenario above is an uptrend, where the upper band serves as a dynamic resistance level. Scrolling back to previous price data, the current dynamic level corresponded to the previous price swing point.
Scenario 2 (Downtrend)
The scenario above is that of a downtrend, where the lower band serves as a dynamic support level. Scrolling back to previous price data, the current dynamic level corresponded to the previous price swing point.
Question 6
What's your understanding of price breakouts in the Crypto ecosystem? Discuss breakouts with Keltner Channels towards different directions. (Screenshots required).
Breakouts in Crypto Trading
Breakouts in trading occur after a period of sideways movement of price, where price fluctuates within a determined level of resistance and support. The Keltner channel indicator can be used to confirm the breakout as volatility is required to break either the dynamic resistance level or dynamic support level before the price can continue in a specified direction. Technically, price breaks above or below the Keltner channel indicator lines. The Keltner channel confirms the move, as its lines move in the same direction as the breakout.
Keltner Channel Bullish breakout
In an uptrend, a breakout can occur at a resistance level, which signals a continuation of the bullish trend. The Keltner channel indicator confirms the breakout with price breaking and closing above the upper band (dynamic resistance). This break confirms the bullish volatility that supports the bullish movement of price, enabling traders to prepare for the incoming bearish trend. To illustrate this, consider the chart below:
As observed above, price broke and closed above the upper band, and the middle line served as a dynamic support. This signaled a possible bullish trend movement. The bullish trend followed the breakout confirming the Keltner channel breakout signal.
Keltner Channel Bearish breakout
In a downtrend, a breakout can occur at a support level, which signals a continuation of the bearish trend. The Keltner channel indicator confirms the breakout with price breaking and closing below the lower band (dynamic support). This break confirms the bearish volatility that supports the bullish movement of price, enabling traders to prepare for the incoming bearish trend. To illustrate this, consider the chart below:
From the chart above, the price broke and closed below the lower band, and the middle line served as a dynamic resistance. This signaled a possible bearish trend movement. The bearish trend followed the breakout, confirming the Keltner channel breakout signal.
Question 7
What are the rules for trading breakouts with Keltner Channels? And show valid charts that work in line with the rules. (Screenshot required).
Breakout Trading Rules Using Keltner Channel
Trading breakouts using the Keltner channel strategy requires that some set of rules are to be followed to ensure optimal results. The rules are as follows:
Scenario 1- Bullish
In a bullish scenario, the following rules are to be followed
1) First, identify a range or reversal pattern and observe where price broke and closed above the upper band which serves as a dynamic resistance.
2) Wait for price to respect the resistance and pull back toward the middle line. This serves as a retest of the previous structure point.
3) If the middle line (EMA) dynamic support holds price within the upper band and the middle line, wait for 2 - 3 bullish candles to form before opening a buy position.
4) Use proper risk management, where stoploss should be placed below the middle line serving as a dynamic support. A positive risk to reward ratio should be used as well, or at least a 1:1.
To illustrate this, consider the chart below
Scenario 2- Bearish
In a bearish scenario, the following rules are to be followed:
1) First, identify a range or reversal pattern and observe where price broke and closed below the lower band which serves as a dynamic support.
2) Wait for price to respect the support and pull back toward the middle line. This serves as a retest of the previous structure point.
3) If the middle line (EMA) dynamic resistance holds price within the middle line and the lower band, wait for 2 - 3 bearish candles to form before opening a sell position.
4) Use proper risk management, where stoploss should be placed above the middle line serving as a dynamic resistance. A positive risk to reward ratio should be used as well, or at least a 1:1.
To illustrate this, consider the chart below
Question 8
Compare and Contrast Keltner Channels with Bollinger Bands. State distinctive differences.
Bollinger Bands and Keltner Channel
Bollinger bands and the Keltner channel are both channel-based indicators that share some similarities like, both indicators can be used in identifying the trend, used as dynamic resistance and support to price movement, the breakouts confirms the signals, etc. But there are some notable differences between them, they include:
1- Bands
Bollinger bands
The upper and lower bands of the Bollinger bands indicator are derived using the standard deviation of price fluctuation. This is affected by the sizing of the candles forming within the band, where larger candles create wider bands and smaller candle creates small bands.
Keltner Channel
The upper and lower bands of the Keltner channel are derived using the average true range (ATR), which represents the true range of price creating corresponding bands relative to price movement.
2- Signal Representation
Bollinger bands
Due to the standard deviation used in Bollinger bands, it tends to react slowly to price on a short-term basis by creating a smoothened chart representation. This generates late signals.
Keltner Channel
The ATR used in the Keltner channel results in the fast representation of price data on a short-term basis. This in some cases generates false signals as it reacts quickly to price development.
Question 9
Place at least 4 trades (2 for sell position and 2 for buy position) using breakouts with Keltner Channels with proper trade management. Note: Use a Demo account for the purpose and it must be recent trade. (Screenshots required).
1- Sell Trade ETHUSDT (30 MINS)
From the ETHUSDT chart above, the price ranged and broke below the lower band of the Keltner channel, which indicated a possible bearish trade signal. The middle line (EMA) maintained the resistance as price pullback to retest the previous structure point. I executed a sell trade order after the formation of two bearish candles below the middle line.
The sell trade position was executed at $3,823.99 with stoploss at $3,854.80 and take profit price at $3,705.00. The trade has a risk to reward of 1: 3 with the Stoploss placed above the middle line serving as dynamic resistance, and the take profit targeting the previous low points.
2- Sell Trader TRXUSDT (15 MINS)
From the TRXUSDT chart above, the price ranged and broke below the lower band of the Keltner channel, which indicated a possible bearish trade signal. The middle line (EMA) maintained the resistance as price pullback to retest the previous structure point. I executed a sell trade order after the formation of two bearish candles below the middle line.
The sell trade position was executed at $0.07593 with stoploss at $0.07638 and take profit price at $0.07495. The trade has a risk to reward of 1: 2 with the Stoploss placed above the middle line serving as dynamic resistance, and the take profit targeting the previous low points.
3- Buy Trade BTCUSDT (1 MIN)
From the BTCUSDT chart above, price ranged and broke above the upper band of the Keltner channel, which indicated a possible bullish trade signal. The middle line (EMA) maintained the support as price pullback to retest the previous structure point. I executed a buy trade order after the formation of two bullish candles above the middle line.
The buy trade position was executed at $46,125.51 with stoploss at $46,040.41 and take profit price at $46,291.68. The trade has a risk to reward of 1: 2 with the Stoploss placed below the middle line serving as dynamic support, and the take profit targeting the previous high points.
4- Buy Trade LTCUSDT (5 MINS)
From the LTCUSDT chart above, price ranged and broke above the upper band of the Keltner channel, which indicated a possible bullish trade signal. The middle line (EMA) maintained the support as price pullback to retest the previous structure point. I executed a buy trade order after the formation of two bullish candles above the middle line.
The buy trade position was executed at $148.4 with stoploss at $147.2 and take profit price at $151.6. The trade has a risk to reward of 1: 2.1 with the Stoploss placed below the middle line serving as dynamic support, and the take profit targeting the previous high points.
The executed trade orders
Question 10
What are the advantages and disadvantages of Keltner Channels?
Advantages of Keltner Channel indicator
The Keltner channel indicator has some advantages which include some of the following:
1- Easy to understand
The graphical representation of the Keltner channel indicator is relatively easy to understand as it contains three lines forming the channel that conveys the information unlike when compared to indicators like Ichimoku with multiple lines.
2- Trend Confirmation
The Keltner channel indicator helps traders confirm the identified trend and the probabilities of the current trend changing as well as the volatility of the trend with the Keltner channel line formation of upper and lower bands respectively.
3- Signals Confirmation
The Keltner channel indicator confirms trade signals with the break and close (breakout) above or below the upper or lower bands, with the middle line (EMA) serving as dynamic support or resistance. This is very useful to traders as buy or sell signals can be easily identified.
Disadvantages of Keltner Channel Indicator
The Keltner channel indicator has some disadvantages which include some of the following:
1- False Signals
The Keltner channel indicator uses the ATR in its calculation, which represents the true range of price. This feature makes the Keltner channel react fast to price development on a short-term basis, which results in the generation of false and distorted signals.
2- Late Confirmations
The Keltner channel indicator in some cases confirms trend and breakouts late, which greatly reduce the potential risk to reward ratio to be realized in a trade position.
Conclusion
Keltner Channel indicator is a volatility-based indicator that is comprised of three oscillating lines that indicates the volatility and momentum of a trend through its lines (Upper band, lower band, and EMA), where the EMA is placed at the middle of the upper band and the lower band. Keltner Channel indicator works by representing the volatility of a traded market with the upper and lower bands, which are set to two (2) times the average true range (ATR) above and below the EMA (this can be changed accordingly depending on the trading system and strategy).
Bollinger bands and the Keltner channel are both channel-based indicators that share some similarities like, both indicators can be used in identifying the trend, used as dynamic resistance and support to price movement, the breakouts confirms the signals, etc.
Thank you professor @fredquantum for this educative and insightful lesson.
Nice Explanation from you.
Well written dude :)