Binary Options Keltner Channels

A Keltner channel is a volatility-based technical analysis indicator that is popular among binary options traders, consisting of a central line displaying an asset’s moving average flanked by upper and lower bands. The space between the upper and lower bands forms a channel that moves with the asset’s price, hence the name. Binary options Keltner channels can be modified according to users’ parameters and employed for a variety of reasons but are generally used to gauge market sentiment and trend direction, with many traders combining these with other indicators to predict when a trend is about to change.

This review will provide a definition and detailed explanation of Keltner channels and some of the ways binary options traders can use them to boost their performance.

Keltner Channels Explained

Keltner channels are named after Chicago grain trader Charles Keltner, who described the method in his 1960 book “How to Make Money in Commodities”, calling it the 10-day moving average trading rule.

While Keltner made no claim that he created this rule, and the most popular setups today use different parameters, the Chicago trader’s name has become inextricably linked to this indicator, so today you will find Keltner channels listed among the analysis tools on many binary options trading platforms.

How Are Keltner Channels Used In Binary Options Trading?

Most traders will become familiar with binary options Keltner channels as an overlay that can be placed on price charts on their preferred trading platform. The first step toward using this indicator to inform your trades is becoming familiar with how to access and read it.

Pocket Option and many other binary options brokers provide users with proprietary trading platforms, and many of these come with Keltner channels among the list of built-in indicators. If this is the case, the Keltner channel can usually be found on a drop-down menu or tab on the price chart screen.

Some dedicated trading software, such as MetaTrader’s MT4 and MT5, may require users to download a plug-in to access the Keltner channel overlay. Other software, such as TradingView, comes with the Keltner channel and many other indicators built in.

Keltner Channel Charts – Pocket Option

Once the binary options Keltner channel indicator is up and running, you should see something resembling the six-hour Amazon price chart in the image above. The central line is the moving average, while the top and bottom lines are calculated by finding 2x an Average True Range (ATR) above and below the moving average. These terms will be explained at more length later.

Before moving onto to technical side of the binary options Keltner channel and more detailed information about strategies for trading with it, the chart above can give a basic idea of how traders may use it.

The binary options Keltner channel obviously tracks the trend of the price movement, with a channel angled upwards showing a trend of rising prices and the opposite showing a downtrend. But the aspect that many binary options traders find useful is where the price falls in relation to the bands. Since the price movement will occur most of the time within the channel and close to the moving average, it is thought to be significant when the price moves to touch or pass the upper or lower limit. The theory is:

• The price touching the upper limit is a bullish sign
• The price touching the lower limit is a bearish sign

As such, a price that remains close to the upper limit during an uptrend may confirm the bullish signals shown by the general price movement, while a price that approaches the upper limit during a downtrend may signal that the trend is about to reverse.

Conversely, a price that skirts the lower band during a downtrend will often confirm the falling price movement, and if the price drops that low during an uptrend, there is a good chance the rally is over.

Some of these dynamics can be seen in the example above, with the price starting off on a downtrend which is confirmed by successive movements around the lower band until almost 22:00. At this point, a rally is attempted, but fails to get close to the upper band before the price crashes back to the Keltner channel’s lower limit at around 22:20. This confirms another short downtrend before the price begins to level out.

How Are Keltner Channels Calculated?

While Charles Keltner originally used a 10-day simple moving average to calculate the centre line, today many binary options traders use different methods to plot their Keltner channels. One common example is the use of an Exponential Moving Average (EMA), which takes into account price history while also applying weighting to recent prices, to form a centre line.

In this case, the upper and lower limits would be calculated by finding the Average True Range (ATR), multiplying it, and adding or subtracting the EMA. The EMA is usually calculated based on 20 periods, and the ATR on 10.

Most trading platforms will handle the algorithm for this automatically, and it is not necessary for traders to know all the maths to benefit from binary options Keltner channels. But what you should remember is that this indicator’s parameters are flexible, so they can be easily modified to suit your specific asset, trading times and market conditions.

Keltner Channel Settings – Pocket Option

The image above, for example, shows the simple box that traders on Pocket Option can use to set the desired parameters for their own Keltner channel. The “period” refers to the number of periods of price action used to make the calculations.

Perhaps most important for binary options traders is the multiplier, which will set the distance of the upper and lower limits from the centre line. Multipliers of 2–3 are the most frequently used for binary options Keltner channels, but traders should think carefully about the asset they are trading to work out which multiplier will suit them best.

Binary Options Strategies That Use Keltner Channels

Keltner channels can be used in a broad range of contexts and the strategies will vary depending on what you are trading, the binary option contract length, the current market conditions and many other daily factors. With that said, there are a few common systems that binary options traders use with the Keltner channel to improve their hit rate.

Reading Market Trends

As we touched on above, one of the main uses of Keltner channels in binary options is to get a general idea of market trends. A price that stays consistently near the upper or lower limits of the channel is thought to confirm an uptrend or downtrend, respectively. At the same time:

• If a price moves upward during a downtrend but remains near the centre line, this indicates little buying interest. The downtrend will likely continue.
• If a price nears the upper band during a downtrend, this may indicate that a reversal is coming.

The same is true when the price trend and movements are reversed. And, if a price tends to bounce between the upper and lower bands without breaking through, many binary options traders will use these bands as support and resistance levels and trade accordingly.

Reversals

Reversals are important to binary options traders, and if correctly identified they are often good occasions to place a trade.

The use of binary options Keltner channels to identify reversals will depend greatly on the asset being traded. While stocks tend toward price reversals more frequently, a forex pair may be more prone to continuing trends.

Many binary options traders use Keltner channels to get a sign of an upcoming price reversal by looking for when the price closes outside the channel. This is considered an extreme price movement and in line with conventional wisdom will usually be followed by a reversal.

The image from the Apple chart (4 hours) shows an example of this. The candle at around 08:48 rises past the Keltner channel’s upper limit, and this is followed by a series of successive steps down. This would have made an ideal opportunity for a binary options trader to place a series of put or low trades.

While this example illustrates the way the binary options Keltner channel can indicate a reversal, it is not as simple as waiting for the price to exceed the channel’s limits before placing a trade. You should also bear in mind other factors, such as the day’s high and low prices, trading volume, and so on. We also recommend combining the Keltner channel with other binary options indicators to gain added insights.

Keltner Channels And Other Indicators

The binary options Keltner channel is a useful indicator, but it is not a sure-fire predictor of market movements. A price movement closing above the channel’s upper limit may indicate that a reversal is coming, but it may also be the first big step up in a bullish run.

It is, therefore, useful to combine the Keltner channel with other volume and volatility indicators to spot patterns. One thing to watch out for is trading volume – if volume is low, and a candle closes outside the channel’s limits, there is a better chance that a reversal is coming.

Another method would be to combine the Keltner channel with a secondary chart indicator. In the example above, the Keltner channel is being used in conjunction with a stochastic oscillator on a 10-minute Apple OTC chart.

As we can see, the price falls below the binary options Keltner channel’s lower limit at around 11:09. But since the following candle saw the price fall even further, if you used this to indicate a coming price reversal with a 1-minute binary options contract, you would lose your money.

Many traders use the Keltner channel to spot a potential price reversal, which they confirm by checking the stochastic oscillator. As the example shows, when the price first finished below the Keltner channel, the fast (blue) line is still below the slow (orange) line. But once this line crosses over, the reversal occurs and the price begins to rise.

This is just one example of how binary options Keltner channels can combine with other indicators in a strategy. Traders should continually research technical analysis and other indicators to build a picture of what works best for their chosen asset and binary options contract length.

Keltner Channel Breakout System

Some traders use the binary options Keltner channel to gauge whether a big price movement can be expected throughout the trading day. The Keltner channel breakout system is a method used by day traders near the beginning of a trading day to signal when a strong price movement in either direction may be on the cards.

This breakout strategy in the simplest terms is where traders watch the price during the first 30 minutes of a major market opening and use the binary options Keltner channel to indicate whether a strong uptrend or downtrend will occur. A price that breaks above the channel’s upper bound is believed to indicate a strong upward price movement, and traders using this strategy would take long/high positions. The reverse would indicate a downtrend, and traders would go short/low.

Learning & Training

This guide provides a first step toward using Keltner channels to make winning binary options bets. However, a wealth of additional educational material is available online for this and many other binary options trading methods.

A good first step may be to check your binary options broker’s website for information on Keltner channels. This is especially useful since any examples given will be shown on the platform you use, and thus are directly relevant to your own trades.

Traders can also learn the Keltner channel approach through books, online tutorials, pdfs and resources found on social media sites such as YouTube, many of which are free. Some binary options traders might also find it useful to join a Telegram channel or forum with experienced traders to pick up tips.

Another good way to become familiar with Keltner channel binary options trading is to check charts and other historical data to see how the price has reacted to different situations in relation to the channel’s boundaries. This can also be a useful way to see which other indicators mesh well with the Keltner channel approach.

Once a trader has a firm idea of how they want to use the Keltner channel, they can make use of a binary options broker’s demo account to test their strategy. This is the best way to see whether or not your approach to the Keltner channel is working, and if it is, under which conditions it works best.

Tips & Tricks For Keltner Channel Binary Options Trading

• Make sure you check your Keltner channel settings before you start trading. Sometimes, the default settings are not the most useful for your trading strategy and goals.
• If you consistently make trades on the go, try to ensure you use a binary options app that supports the Keltner channel indicator.
• Some traders set up alerts or notifications based on price movements in relation to binary options Keltner channels. These can be useful for keeping track of potential reversals.
• Binary options Keltner channels can also be used while setting parameters for an automated trading algorithm or bot.

Bottom Line On Keltner Channels

Keltner channels are a useful indicator for binary options trading, since they give traders a way to easily view the trend of price movement and can offer reliable signals about when a change in trend is coming. However, traders should not rely solely on binary options Keltner channels when placing trades, and instead should keep abreast of news events, apply their own knowledge and instincts about the specific market conditions, and add in other technical analysis tools for more reliable signals.

Check out our list of the top binary options brokers to start using Keltner channels today.

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