Keltner Channel Trading Strategy
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The Keltner Channel is popular among stock market investors and is commonly used for a variety of trading strategies.
If you are looking to learn a Keltner Channel trading strategy or want to understand more about Keltner Channels in general, then you're in the right place.
This article will offer a complete Keltner Channel trading strategy that can be used by active traders. First, let's go over how Keltner Channels work.
What Exactly Is a Keltner Channel?
Keltner Channels are depicted as a set of three lines on a stock chart.
The above image is a stock chart for Tesla. You can see the Keltner Channel lines in that image: the tan line, blue line, and red line.
The middle line can be thought of as the anchor. With the default settings, it's a 20-period moving average line.
The upper and lower lines are both set at equal distances away from the center line. The distance of those lines is a multiple of the stock's ATR value.
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Example of a Keltner Channel Trading Strategy You Can Use
Keltner Channels can be helpful for identifying trends. The trading strategy we're going to feature here offers a way to identify an uptrend and buy low. It's a type of pullback trading strategy.
For this particular Keltner Channel trading strategy, we're going to use a daily chart. That means it would be a swing trading strategy.
It's also going to use the default Keltner Channel settings.
That image shows a stock chart for Apple. You can see the Keltner Channel indicated on the chart.
Entry for the Keltner Channel Trading Strategy
The entry for this Keltner Channel trading strategy will be as follows:
The entry criteria for our Keltner Channel trading strategy is very simple. You can see in the image above that at the yellow arrow, the price first crosses through the upper Keltner Line. Then the first time the price reaches the middle blue line thereafter is where the orange arrow is.
The orange arrow represents the entry signal for this trading strategy.
If an investor had bought the stock using the trading strategy's entry criteria, you can see that he or she might have profited since the stock price generally moved up thereafter.
It's important to note that the value of the middle moving average line is not finalized until the trading day is over. For the purposes of this trading strategy, we will project the value of the middle moving average line by taking the difference of the prior two days' moving average values and adding it to the prior day's moving average value.
This gives a precise number where an entry order can be placed that doesn't depend on waiting for the final value of the moving average line for the current day.
Exit for the Keltner Channel Trading Strategy
There are a lot of possibilities here for the exit.
For any given trading strategy, it can be helpful to define three different criteria for the exit: profit target, stop loss, and time limit.
Not everyone uses all three, and that's totally fine. Ultimately you can set these values however you want. But for the purposes of this strategy, we will define all three:
We will set the profit target at 1 ATR away from the entry price.
ATR is an indicator in the stock market that measures a stock's recent price volatility. Most trading platforms have it available as an indicator you can enable.
Our profit target criteria indicates that we will take the ATR value for the stock and add it to the price we paid when we bought the stock. That will be our profit target and we can set up a sell limit order at that price.
We will set the stop loss at 1 ATR away from the entry price. This means we take the ATR value for the stock and subtract it from the price we paid when we bought the stock.
That will be our stop loss and we can set up a stop order at that price.
We will set the time limit as one week since this is a swing trade. If the stock has not hit either the profit target or stop loss by the time limit, then we will close the trade manually at the opening bell seven days after entry.
This video offers more information about the Keltner Channel trading strategy we're describing:
Performance of This Keltner Channel Trading Strategy
If we apply this Keltner Channel trading strategy to the Apple example above, the results would be as follows:
The entry price shows as being $160.38.
Since the ATR value at the time of the trade entry was 2.95, it means the profit target would have been set at $163.33 and the stop loss would have been set at $157.43.
Within a day after the entry, the price of Apple reached the profit target in our example: $163.33. That means this trade could have made a profit of $2.95 per share.
This Keltner Channel Trading Strategy Doesn't Always Win
The example above shows a case where this strategy might have generated a profit.
But that's just one example, and it's not enough to say with certainty that this Keltner Channel trading strategy would be profitable for you in the long run.
There are plenty of examples of this strategy losing as well, and ultimately the only way to be sure that any given trading strategy has a track record of success is to look at how it's performed in the past.
Our Research on Keltner Channel Trading Strategies
Our specialty here at Stock Market Guides is researching how trading strategies have performed historically. We've spent a lot of time researching Keltner Channels.
We did backtests and determined which Keltner Channel settings may have been most effective historically.
We also studied which stocks had the best results with using the Keltner Channel indicator.
We used that information to create our own Keltner Channel trading strategies, and you can learn the strategies and follow our Keltner Channel trade alerts by signing up for our service.
Learning More About Keltner Channels
You can contact us any time if you would like to ask any questions about Keltner Channels or about trading in general.
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