Whether we are talking about Binary Options or any other market, it is always a constant search for a balance between supply and demand. Departure from that very balance or “center of mass” is an abnormal situation, which means you need to be able to interpret it correctly.
Various moving averages and channel indicators based on them allow you to determine how much the price behavior differs from the usual one within a specified period. So, today we will talk about the Keltner Channel – a channel indicator based on simple moving averages and average price changes. This calculation method was first described by Chester Keltner in his book How to Make Money Trading on the Stock Exchange.
The indicator itself is easy to learn, adjusts to the volatility of the instrument and, in comparison with analogs – Bollinger Bands and Envelopes , gives fewer false signals, which is extremely important in trading Binary Options.
Description of the strategy
Before using the tool, you must first study its structure. In fact, this is the key to the success of subsequent work, the results of which may otherwise be unpredictable. So, if you figure it out, you can even calculate the Keltner Channel manually on a piece of paper, and this is already an indicator.
The indicator accepts only 2 parameters as input: the period and the coefficient K. The period is responsible for the “memory” of the indicator, and the coefficient for the channel width.
First, the average candlestick range for the specified period is calculated. The difference between the high and the low is taken as the candle’s range. Further, the calculated value of the average range multiplied by K is added to the current value of the simple moving average (yellow line on the chart) – this is the upper border of the channel. To calculate the lower bound, the same value must be subtracted.
The Keltner channel can be traded in two ways: on a rebound from the borders inside the channel and on price reversals – a breakdown of the external borders. The second method implies counter-trend trading, which in itself implies increased risk and requirements for entry accuracy.
A much simpler option, especially for beginners, is to trade on the rebound from the borders during the night flat. At this time, the price practically does not go beyond the channel boundaries, and its movement is generally more predictable.
The essence of trade is as follows. Since going beyond the channel boundaries is a strong deviation from the norm, the price loses momentum, which in most cases is expressed in the form of a rollback (correction). Our task, having fixed the breakdown, open the option in the opposite direction so as to catch the same pullback.
Buying a Call Option:
- We are waiting for the candlestick to close beyond the lower boundary of the channel. In this case, the opening price must be within the channel;
- At the opening of the next candle, buy a Call option with an expiration of 1 candle.
Buying a Put option:
- We are waiting for the closing of the candlestick beyond the upper border of the channel. In this case, the opening price must be within the channel;
- At the opening of the next candle, buy a Put option with an expiration of 1 candle.
It is very important to wait until the candlestick closes because until the candlestick is fully formed there is no guarantee that the channel has actually been broken. At the same time, only the first breakout of the border is considered a signal. That is, the opening price of the signal candle should be within the channel boundaries and nothing else.
For the best results, we trade only during the Asian session – from 2.00 am to 12.00 pm Moscow time. At this time, the market is quite calm – which facilitates intra-channel trading.
Examples of deals
Channel trading with a good channel indicator is not a difficult task. If you strictly follow the rules of the system, you can increase the share of successful transactions up to 80% or more.
The price momentum is sometimes so strong that there is simply no time for a correction. In such cases, you can open additional trades at each next candlestick until we get a profit. But I would not advise doing this, since such a surge can also mean a trend reversal. Therefore, if the deal did not work, we patiently wait for the next signal.
An important point is that if the candlestick closed at the level with the channel line, this is not considered a breakout. Ideally, you need a small filter, literally a few points, in order to consider the breakout to have taken place. In this example, this would radically change the outcome of the trade.
A trading strategy based on the Keltner Channel is ideal for anyone who prefers a simple and straightforward system without unnecessary complications. Also, the channel indicator is ideal as a basis for your own TS if you want to improve it, for example, add a trend element. The main thing is a solid foundation, and in this regard, the Keltner Canal shows its best side.