[Trading Crypto with Keltner Channels] - Crypto Academy / S5W6 - Homework Post for professor @fredquantum.
Good day steemians, This is season 5 week 6 and I'll be doing the advanced task assigned by crypto professor @fredquantum
TASKS
Creatively discuss Keltner Channels in your own words.
Setup Keltner Channels on a Crypto chart using any preferred charting platform. Explain its settings. (Screenshots required).
How are Keltner Channels calculated? Give an illustrative example.
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)
What is Dynamic support and resistance? Show clear dynamic support and resistance with Keltner Channels on separate charts. (Screenshots required).
What's your understanding of price breakouts in the Crypto ecosystem? Discuss breakouts with Keltner Channels towards different directions. (Screenshots required).
What are the rules for trading breakouts with Keltner Channels? And show valid charts that work in line with the rules. (Screenshot required).
Compare and Contrast Keltner Channels with Bollinger Bands. State distinctive differences.
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).
What are the advantages and disadvantages of Keltner Channels?
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1. Creatively discuss Keltner Channels in your own words.
Keltner Channels is a technical analysis indicator introduced by a grain trader named Chester W. Keltner in the 1960's, in his book titled "How to Make Money in Commodities.” Its a volatility based indicator which is made up of three oscillating lines (The upper band, the lower band and the EMA).
Although this indicator was created by Chester Keltner, it was eventually revised by Linda Bradford Raschke by the addition of an ATR, different averaging periods and an EMA. Keltner Channels helps to catch market volatility by representing market volatility with upper and lower bands which are then set to two times the Average True Range above and below the EMA. As a result of this setup, most price action would occur within the channel and we can identify price changes, breakouts, the direction of the trend, dynamic supports and resistances.
By paying attention to the angle of the channel formed, traders can identify the existing market trend. For instance, in a bullish market characterized by persistent higher high formation, the Keltner channel would be rising while a Falling channel indicates a bearish condition.
2. Setup Keltner Channels on a Crypto chart using any preferred charting platform. Explain its settings.
Setting up Keltner Channels on tradingview
- Firstly, i head over to tradingview and click on charts of my choice.
- Next, i select the tab marked fx indicators at the center top.
- In the search bar, type in Keltner channels and click on the indicator to add it to the chart.
Once that is done, the indicator would be added to chart as displayed below.
keltner channels indicator added to chart
Keltner channel settings
To access the settings of the indicator, hover around the indicator name which would be located at the top left corner and click on the settings icon.
The different customizable settings of the indicator include
INPUT
In the Input menu, the Keltner channel default setting includes a period of 20, a multiplier of 2, and an ATR length of 10. Through the input tab, traders can make changes and customizations to suit their trading styles. For example, long-term traders would want to use higher period settings while short-term traders or scalp traders would use shorter indicator period settings.
The best indicator settings can be discovered by backtesting different indicator strategy.
STYLE
In this tab, the indicator appearance settings such as the indicator curve color, thickness, and precision for the upper and lower bands as well as the EMA can be customized to traders' preference.
3. How are Keltner Channels calculated? Give an illustrative example.
Keltner channel is composed of three lines.
The upper band, lower band and the middle line.
The middle line of the channel is an EMA line with default periods of 20.
Based off the EMA, we can then calculate the upper and the lower bands with respect to the Average true range given.
The upper band = EMA + 2 × ATR
The lower band = EMA - 2 × ATR2
calculating the upper band
To prove this calculation, i'll be making use of a chart pair with Average true range of 10 periods added to chart. The necessary parameters and their value have been marked out using an ellipse tool on the chart.
The value of the upper band is given as 6.3012
I'll be calculating this using just the value of the ATR and the EMA(Middle line).
EMA = 6.0082
ATR = 0.1465
Upper band = EMA + 2 × ATR
6.0082 + (2 x 0.1465)
6.0082 + 0.293
6.3012
I've been able to get the correct value for the upper band using the mathematical formula.
calculating the lower band
Here also, an ATR of 10 periods has been added to chart with necessary parameters and their value highlighted with an ellipse tool in chart.
The value of the lower band is given as 1.293
I'll be calculating this using just the value of the ATR and the EMA(Middle line).
EMA = 1.333
ATR = 0.020
Lower band = EMA - 2 X ATR
1.333 - (2 X 0.020)
1.333 - 0.04
1.293
Again, i've been able to get the correct value for the lower band using the mathematical formula.
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
Trend Confirmation using Keltner channel indicator
By observation of the angular position of the three lines that make up the keltner channel the current trend in the market can be confirmed.
Uptrend confirmation with keltner channel
In a bullish market situation, the upper band, lower band and the middle line in the keltner channel slopes upwards forming an upward angle while price action moves within the upper band(which would serve as dynamic resistance) and middle line(which would serve as support). An example of an uptrend market scenario is given below.
uptrend confirmation using keltner channels
downtrend confirmation using Keltner Channels
Similarly, in a bearish market structure, the angle of the keltner channel also plays an important role in trend confirmation. In a bearish situation, the angle of movement of the channel would slope downwards with the formation or lower highs and lows in the market. Here price would move between the middle line (which would serve as resistance) and the lower line (which would serve as support).
An example of a downtrend market scenario is given below.
downtrend confirmation using keltner channels
sideway/ranging markets and keltner channels
In a sideway or ranging market, the keltner channels shows a lateral angular formation in which price oscillates between the upper band and the lower band with the upper band serving as resistance and the lower band as support.
An example of this scenario is given below
sideways market and keltner channels
Combining 200 MA with Keltner Channels
Just like any other technical indicator that exists, the Keltner channel also has the tendency to give forth false signals and by combining the Keltner channel with a 200 MA, the accuracy of signals given off is increased. With the use of the 200MA which is a high period, trends can be filtered out and this way we can avoid some false signals.
Some things to observe when using the 2OOMA to filter trend confirmation from Keltner Channels include
In an uptrend
In a bullish market, the 200MA should be below the price and the Keltner Channel while an upward angular formation of the keltner channel is maintained. This confirms the uptrend, an example of such scenario is given below
200MA in uptrend market
In a downtrend
In a bearish market, the 200MA should be above the price and the Keltner channel while a downward angular formation of the keltner channel is maintained. This confirms the downtrend, an example of such scenario is given below
200MA in downtrend market
In sideways market
In a sideways market, the 200MA will be spotted in between price and the Keltner channels indicating the absence of a clear defined trend in the market while the upper band and lower band of the channel serves as support and resistance respectively. An example of this is given below;
200MA in sideways market
5. What is Dynamic support and resistance? Show clear dynamic support and resistance with Keltner Channels on separate charts.
Dynamic support and resistance are areas where price can pull back to in the market and find support or resistance without having to be at a horizontal level.
These dynamic levels are located diagonally and can often be found when using indicators like the moving averages or keltner channels.
Keltner channels help to observe these diagonal dynamic levels for each market scenario using the upper band, middle line and lower band. The upper band ideally serves as dynamic resistance while the lower band functions as a dynamic support level.
An example of this is given below
dynamic resistance
dynamic resistance with keltner channels
The SOL/USDT chart above is an uptrend scenario and on numerous occasions, the upper band has served as dynamic resistance as highlighted in the chart.
dynamic support
dynamic support with keltner channels
The chart scenario is a downtrend market structure with the lower band serving as dynamic support on multiple occasion as highlighted in chart.
6. What's your understanding of price breakouts in the Crypto ecosystem? Discuss breakouts with Keltner Channels towards different directions.
Breakouts in crypto trading
Breakouts usually occur after a sideways movement in market and its a usual practice for trades to plot support and resistance levels to determine where the price would move after a breakout. i.e if price breaks above resistance, it indicates a potential continuous bullish movement and similarly if price breaks below support it indicates a potential continuous bearish movement.
Breakouts can be confirmed using the Keltner channel as volatility is needed to break through dynamic support and resistance zones and whenever a breakout occurs, the movement is confirmed whenever the kelter channel moves towards the same direction as the breakout.
Keltner Channel bullish breakout
When trading using the Keltner Channel, a bullish breakout occurs whenever a bullish candle closes above the upper band of the channel. This is an indication that a bullish move might continue and this signal helps to prepare traders for a likely incoming bullish move. An example is given in the chart below
bullish breakout with the Keltner Channel
In the chart pair above, the price of the asset closed above the resistance line as indicated by the ellipse tool. The price of the asset ranged between the breakout zone for a while before continuing with the bullish movement which was followed with large volumes. This is observed as price kept trading above the upper band for a while.
Keltner Channel bearish breakout
A bearish breakout also occurs whenever a bearish candle closes below the lower band of the Keltner channel. This is an indication of an incoming bearish move. An example of this situation is given in the LTC/USDT chart pair below.
bearish breakout using Keltner Channel
In the LTC/USDT chart pair above, we observe price broke out to the downside after ranging for a while and closed below the support line (lower band). Price resisted for a while before continuing with the downtrend. By spotting the first breakout, traders can take advantage of the incoming downward momentum.
7. What are the rules for trading breakouts with Keltner Channels? And show valid charts that work in line with the rules.
Rules for trading bullish breakout with Keltner Channels
- Firstly, identity a price break after a range or reversal market observing where the price closed above the upper band/ dynamic resistance.
- Be patient for price action to respect the dynamic resistance and pull back towards the middle line.
- If price pulls back to the middle line and moves within the middle line and upper band for a while, wait for 2 - 3 bullish candles to form and the open a buy position.
- Employ proper risk management, place stop loss below the dynamic support (middle line/EMA), and have a good risk-reward ratio.
An illustration is given in the SOL/USDT trade below
Trading bullish breakout with Keltner Channels
Rules for trading bearish breakout with Keltner Channels
- Firstly, identify a price break after a range or reversal market observing where the price closed below the lower band/ dynamic support.
- Be patient for price action to respect the dynamic support and pull back towards the middle line to retest the previous structure point.
- If price pulls back to the middle line sand moves within the middle line and the lower band for a while, wait for 2-3 bearish candles to form and then open a sell position.
- Employ proper risk management, place stop loss above the middle line (dynamic resistance) with a good risk/reward ratio.
An illustration is given in the LTC/USDT chart pair below.
Trading bearish breakout with Keltner Channels
8. Compare and Contrast Keltner Channels with Bollinger Bands. State distinctive differences.
Bollinger bands and Keltner Channel
The Bollinger bands indicator and Kelter channels are widely recognized indicators for measuring volatility and capturing price action however
One major difference between the two is that while Keltner channels represent volatility using high and low prices, the Bollinger bands on the other hand make use of standard deviations to represent volatility.
Also, the Keltner channels are based on the Average True Range, which means that it displays the true width of the price range.
Another difference lies in their signal representation. As a result of the ATR that the Keltner channel incorporates, It would show more fluctuations over a short period of time while the Bollinger bands would seem smoother initially. The Bollinger bands would also make rapid changes and change directions to indicate a change in the market scenario, unlike the ATR indicator which seldom changess its direction completely.
The Keltner channel isnt as sensitive to price changes unlike the bollinger bands therefore it tends to give less false signals.
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.
Buy Trade SOL/USDT 1 hour
screenshot taken from tradingview
In the SOL/USDT chart pair above, the market was in a sideways movement initially until price broke and closed above the upper band of the keltner channel. Shortly after, price retraced to the middle band of the channel to respect the dynamic support and buy entry was placed after the formation of two bullish candlesticks with take profit set above the previous high.
Buy Trade ETH/USDT 1 hour
screenshot taken from tradingview
In the ETH/USDT chart above, its observed that the market was ranging and forming equal highs unable to break above its resistance. Shortly after price broke above the keltner channel and continued trading above it. Price retraced back to the middle band to test the dynamic support and a buy trade was executed after two bullish candlesticks with take profit above the previous high as shown in the chart.
executed buy entry orders
orders executed using trading view paper trading
Sell Trade RDN/BTC 1 hour
screenshot taken from tradingview
In the RDN/BTC chart pair above, the price ranged and broke below the lower band of the keltner channel. The bearish candlestick closed below the lower band however this move wasn't a recent move as requested by the crypto professor. Price retested the middle band and created more bearish candlesticks which closed below the lower band. I waited for price to pull back to the middle line and took a sell trade upon the formation of two more bearish candlesticks with stop loss placed above the middle line.
We can also observe that if the first breakout move was taken, the trade would still be valid as the stop loss would have been placed above initial retest of the middle line.
Sell Trade FTT/BTC 45 minutes
screenshot taken from tradingview
In the FTT/BTC chart pair above, we observe the existence of an initial sideways market after which two large bearish candlesticks were formed whereby the second candlestick closed below the lower band. Price retraced to the middle band shortly after and retested the dynamic resistance after which a sell entry was placed upon the formation of two bearish candlesticks.
executed sell entry orders
orders executed using trading view paper trading
10. What are the advantages and disadvantages of Keltner Channels?
Advantages
- This indicator is simple and basic to understand.
- It helps to spot the emergence of a new trend in the market.
- Aids in placement of stop-loss levels.
Disadvantages
- The Keltner channel indicator is a lagging indicator and therefore may give off signals late which would reduce the potential risk to reward ratio.
- It can give off false signals due to rapid fluctuations in price in a short period.
CONCLUSION
Keltner channels consists of the upper band, the middle line whhich happens to be an EMA line and a lower band. Its an easy to understand indicator which aids in trading.
This basic technical analysis tool helps readers generate buy and sell signals and trade breakouts.
The crypto professor has done an excellent job of explaining the use of this indicator in a simple way. Thanks to the steemit team for the crypto academy, It's done far much in helping me tackle the markets one indicator/strategy at a time.