Keltner Channel and MACD for Swing Trading

Mon Mar 8, 2021, 03:39 pm | by Alexis Jurcak | No comments

Join Ryan Faloona and Jonathan Mallard from Benzinga Pro as they explore the world of indicators. In this video series, they go over how to use common indicators to help you become a better, more successful trader. Today, they’ll be going over how to use the Keltner Channel indicator and how you can integrate this indicator into your trading strategy. 

What Does the Keltner Channel Indicator Tell You? 

The main reason why you would use the Keltner Channel indicator is to determine when to enter and when to exit

In order to understand how you would use the Keltner Channel indicator in your trading strategy, you first need to know what you’re looking at. The Keltner Channel indicator is made up of three lines with varying space in between the three lines. The bottom yellow line is considered the lower band, the middle pink line is referred to as the median, and the top yellow band is your upper band. 

With respect to these three lines, the goal of this indicator is to help you make buying and selling decisions, by determining where the price stands within the boundaries of the lines. In addition to using the Keltner Channel indicator, you can use the MACD to get a clearer picture of where to buy and sell. 

MACD stands for moving average convergence/divergence, and you can see it on the screenshot if you look at the red lines at the bottom of the chart. Ryan and Jonathan will discuss later the importance of using two indicators simultaneously to confirm exit and entry decisions. 

Keltner Channels can be used for any type of trading such as swing trading or day trading. However, Ryan has found that Keltner Channels may be more successful with swing trading. From his experience, when he has more time to let his winners run or let the trade pan out, he is often more successful using the Keltner Channel indicator. 

How to Create Your Keltner Channel Indicator In Benzinga Pro 

In the previous snapshot, you can see that the channel width is very tight and the price is oscillating between the boundaries of the Keltner Channel bands. As time moves forward, you can see the bands expanding as volatility increases. So over time, when the price starts to increase, you can see the channels expand. 

The band in the middle is reflecting a moving average, while the upper and lower bands are reflecting the average true range. In Benzinga Pro, once you’ve added the Keltner Channel indicator to your chart, you can adjust the settings of the bands.  

You are able to adjust the length, which is your moving average. In this example, we have a 20-day moving average. In addition to adjusting the moving average, you can also adjust the multiplier which reflects your true range. The default for the multiplier is set at 1. But, you can increase this to fit your trading strategy. 

You can see that by increasing the multiplier, you’re expanding the channel width of the Keltner Channel. 

Using Keltner Channels in a Real-Life Example Trading Scenario 

Here a few ways that Ryan would use the Keltner Channel indicator in his trading strategy: 

  1. If the stock is in the channel, he would buy on the lower bands and sell on the upper band. 
  2. If the stock is on a reversal, once he sees an outbreak above the upper band, he uses that outbreak as an entry signal.  

When you’re talking about actually trading, the most important thing is your trading plan. In this hypothetical trade, you want to consider where your sell indicator is. Let’s say you want to let your winners run. That would mean you wouldn’t choose an exit point based on profit, rather you would choose an exit point in relation to the indicator that you’re using. 

Ryan’s suggestion would be to sell once the price goes back down below the upper band. In other words, you’re going to want to wait to close the trade until the upper band has been tested in the future. With your exit strategy, you’re going to want to be very specific. Being specific eliminates having to decide on the spot what your exit strategy is going to be. 

For example, you can see the wick on December 2nd is very close to the upper band. You need to be specific as to if you want to close right as it touches that upper band or close right below the upper band. Dependent on what you decide, where you exit will differ dramatically. You can see then on December 10th the candle actually broke through the upper band. If that was your exit strategy you can see how it differs from the December 2nd wick.  The key here is to determine whether or not you’re going to close once it breaks through the upper band or once the entire session closes. 

Ryan’s two biggest tips for successful trades are: 

  1. Know your trading strategy. Have this implemented before the trade, and don’t leave your strategy up to last-minute decisions
  2. Combine as many data points as possible. 

Using the MACD in Accordance with Keltner Channel Indicator 

Another way you can determine your entry point is by using the MACD indicator. Using the MACD and the Keltner Channel indicator side by side gives you extra confirmation of where to set your entry and exit points. If you’re looking at the MACD indicator you would enter when it breaks above the median line, you can see this pattern reflected on the Keltner Channel indicator as well. Looking at the histogram on the MACD, or the red bars, anything above zero is a positive divergence and anything below zero is a negative divergence. 

So, when there was a break above the Keltner Channel there was a positive divergence in the MACD. This can be used as another indicator confirming that the trade at hand is the one you want to be in. Using these two indicators together can help you make more clearer decisions and strengthen your trading plan. 

When using indicators together the biggest factors to look for are if the trends are reflecting one another as well as if the signals are lined up. 

Using The Keltner Channel Indicator in Intraday Trades

The examples illustrated above were highlighting strategies to use when swing trading. However, These indicators can also be very beneficial in other types of trading like intraday trading

If you are trading intraday you may or may not be using candle closes. In Ryan’s experience, if he knows he’s going to be in a day trade, he’s not going to wait for a candle to close. For example, in this particular trade, he’ll take the trade as soon as the candle breaks through the top of the Keltner Channel. To confirm this move you can look at the MACD and the volume. 

What Ryan would do in this particular case would be to set his stop a little bit closer to the median of the Keltner Channel, or midpoint between the median and the upper band. 

Ryan issues a word of caution when using the Keltner Channel indicator on shorter time frames. As you zoom in with shorter time frames you may get more false signals and you may have to loosen your stop to ensure you’re getting exposure for your particular trading plan. 

Final Thoughts

The Keltner Channel indicator is a great tool to use for any type of trading method but especially swing trading. In order to utilize the full abilities of the Keltner Channel indicator, it’s suggested to use it in accordance with other indicators such as the MACD. Remember, everyone’s trading plan and journey are unique to them. What works for one trader may not work for another. Ryan and Jonathan laid out the basic foundations for interpreting the Keltner Channel indicator as well as some strategies you can use to determine your entry and exit points.

Are you ready to implement these indicators into your trading strategy? Try them out today with Benzinga Pro’s free two-week trial

Disclaimer: Benzinga is a news organization and does not provide financial advice and does not issue stock recommendations or offers to buy stock or sell any security. Benzinga Pro is for informational purposes and should not be viewed as recommendations. Benzinga Pro will never tell you whether to buy or sell a stock. It will only inform your trading decisions. You can find our full disclaimer located here.