Trader's Corner, Friday, 03/18/2005
Using Keltner Channels to Set Targets
by OI Staff
HAVING TROUBLE PRINTING?
Traders Corner articles last year introduced Keltner channels. One detailed several uses of nested Keltner channels, including their utilization in setting upside and downside targets. This month's developments on the OEX illustrated how those targets might be set.
For those new to Keltner channels, a brief review might be appropriate, with the review gleaned from last yea'rs articles. Charles Keltner has been credited with formulating these channels as a type of moving-average envelope. Bollinger bands are another type of moving-average envelope familiar to most traders. Keltner built his envelopes around a central moving average, with the envelopes spaced around that moving average by a multiple of the average true range. He intended the channels to identify breakouts, although some traders now combine the channels with oscillator signals to trade from one side of the channel to another. A breakout, the type of play Keltner wanted to identify, occurs when prices close outside the channel lines.
Keltner Channel Breakout on OEX
However, the above chart, employing a single Keltner channel, lacks a vital component. After the breakout, what is the upside target? Nesting several Keltner channels within each other helps to set potential targets.
Setting an Upside Target After a Breakout:
Conclusion of Upside Breakout Play:
The downside target set in the preceding chart was met, too.
Continuation of the OEX's 15-Minute Chart:
Because Keltner lines move as price moves, the next target dropped as the OEX dropped. At times, a tendency exists to meet only the original breakout target, the reason that the most conservative traders might take automatic full or partial profit at that original target. However, the OEX was to more than meet that original 576.63 downside target.
Meeting the Downside Target:
Including the basis lines provides an early warning of a change in trend.
A Change in Trend
What happens if there's a breakout above or below the widest Keltner channel? How is the next target set? On the preceding chart, prices bounces after hitting the lower Keltner channel. If the candles had broken through that channel line instead that Thursday, a trader might have dialed up to a 30-minute or 60-minute chart to look for the next downside target. Anecdotal experience has indicated that dialing up from a 15-minute to a 60-minute chart usually proves more helpful when watching the OEX.
Sixty-Minute Nested Keltner Chart for the OEX:
Trading a vehicle different than the OEX might produce different results. On the OEX and with the Keltner settings shown in this article, three-minute, five-minute, 15-minute, 60-minute, daily and weekly charts appear to work best. They've worked well throughout the rest of March, with a 60-minute breakdown signal on March 16 setting a then almost unbelievable downside target of 564.71, a target that was to be met by Friday, March 18.
For the TRAN, five-minute channel lines appear to work better than either the three- or seven-minute intervals. The Dow and TRAN both conform rather well to the 15-minute charts.
Keltner Settings Employed in This Article:
The first number in each set is the length of the basis line; the second, the multiplier. Experiment with settings, the number of Keltner channels to nest, and the appropriate time intervals that prove a best fit for your trading vehicle.
Other uses for nested Keltner channels exist, but setting upside or downside targets remains one of the most useful.