Trading Success Principles Keltner Bands & Key Moving … · © Trading Concepts, Inc. Trading Success Principles Keltner Bands & Key Moving Averages

© Trading Concepts, Inc.

Trading Success Principles

Keltner Bands & Key Moving Averages

© Trading Concepts, Inc. 2

Trading Success Principles Keltner Bands &

Key Moving Averages

By Todd Mitchell

© Copyright 2014 by Trading Concepts, Inc.

All Rights Reserved

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Table of Contents

The Keltner Channel Bands ....................................................................... 4

SUPPORT in an Uptrend and RESISTANCE in a Downtrend................................. 5

Upside and Downside Mid-Keltner Penetrations ............................................. 7

The 79 Simple and 89 Exponential Moving Averages ....................................... 9

How the 79 SMA and 89 EMA Are Used ...................................................... 11

Trend Change Criteria – UPTREND changing into a DOWNTREND ...................... 14

Trend Change Criteria – DOWNTREND changing into an UPTREND..................... 15

Two other Key Moving Averages Commonly Used as Support & Resistance ......... 16


The Keltner Channel Bands

The Keltner Channel Bands (KCB’s) are based on the market’s volatility expressed as a bars average range (most charting software programs provide the Keltners – if not

you can easily create it yourself). The upper and lower Keltner bands are created on

both sides of an exponential moving average (EMA). A 16 period bar exponential

moving average is used for the mid Keltner band. Therefore, a 16 bar EMA with a multiplier constant of 1.3% above the mid Keltner will become the upper Keltner

band, and a 1.3% multiplier below the mid Keltner will become the lower Keltner

band. These parameters work extremely well for ANY market and ANY time frame. Let’s briefly discuss how they’re used in helping determine the TREND.

2 General Uses for the Keltner Channel Bands:

1. Identifies SUPPORT in an Uptrend and RESISTANCE in a Downtrend.

2. Upside and downside mid-Keltner penetrations through the 79 SMA and 89 EMA.


SUPPORT in an Uptrend and RESISTANCE in a Downtrend

The Keltner channel bands help identify market SUPPORT (potential BUYS) in an

UPTREND. This market SUPPORT comes into play when the market retraces down off

the highest high in an Uptrend between the MID to LOWER Keltner channel bands.

Conversely, the Keltner channel bands help identify market RESISTANCE (potential

SELLS) in a DOWNTREND. This market RESISTANCE comes into play when the market

retraces up off the lowest low in a Downtrend between the MID to UPPER Keltner channel bands.

These principles will remain effective as long as a market is in a TREND, as defined by

the MFAM (and by what is to be discussed next - upside and downside mid-Keltner penetrations through the 79 SMA and 89 EMA). Take a look at the examples below

and on the next page.


SUPPORT in an UPTREND

RESISTANCE in a DOWNTREND


Upside and Downside Mid-Keltner Penetrations

This is simply when the mid Keltner either penetrates UP or DOWN through both

the 79 SMA and 89 EMA (or 3 consecutive price bars are trading completely ABOVE

the upper MA or completely BELOW the lower MA). This generally will indicate that

the TREND has changed in the direction of the mid-Keltner penetration (as long as it’s in the same direction of the MFAM’s TREND). This also means that the 79 SMA and

89 EMA now will act as SUPPORT (potential BUY trade set-ups) when the mid Keltner

crosses UP through both the 79 SMA and 89 EMA, and – of course – they will act as RESISTANCE (potential SELL trade set-ups) when the mid Keltner crosses DOWN

through the 79 SMA and 89 EMA.

It’s really that simple of a concept; all you really are expecting is some type of containment between the mid to lower Keltner (which act as SUPPORT) when the

market is in an UPTREND (defined by the MFAM and the mid-Keltner penetrations)

and the reverse for a DOWNTREND (i.e. mid to upper Keltner). Remember, you will be using the upside and downside mid-Keltner penetrations in conjunction with the

MFAM when determining a market’s overall TREND.

The next page shows examples of both the downside and upside mid-Keltner

penetrations through both the 79 SMA and 89 EMA. Pay special attention to how

the TREND changes in the direction of the mid-Keltner penetration. Also, notice

how the moving averages act as RESISTANCE (SELL SHORT entries) when the mid Keltner crosses down through both the 79 SMA and 89 EMA (or 3 consecutive price

bars close with their HIGHs completely BELOW the lower MA) and how the moving

averages act as SUPPORT (BUY LONG entries) when the mid Keltner crosses up through both the 79 SMA and 89 EMA (or 3 consecutive price bars close with their

LOWs completely ABOVE the upper MA).


Upside mid-Keltner penetration through 79/89 MAs (UPTREND/SUPPORT)

Downside mid-Keltner penetration through 79/89 MAs (DOWNTREND/RESISTANCE)


The 79 Simple and 89 Exponential Moving Averages

The moving average (simple or exponential) is one of the most widely used of all

technical indicators. They’re essentially a trend-following device. Their most basic

purpose is to identify or to signal that a new trend has begun or that an old trend has

ended or reversed. These moving averages are a follower, not a leader. They never anticipate price action; they only react to price. They’re essentially a smoothing

device. By averaging the price data, smoother lines are produced, and it makes it

easier to view the overall TREND (you’re going to use them with the MFAM). The shorter the averages are, the more sensitive they are to price action. The longer the

averages are, the less sensitive they are to price action, thus the smoother they

become.

8 Key Moving Average (MA) Concepts to Understand

1. Rising Moving Averages (MAs) generally represent positive market action or

strength.

2. Falling/declining MAs generally represent negative market action or weakness.

3. The sharper the slopes of the MAs, the stronger the market is in that direction. This important concept applies to both upward and downward slopes.

4. During strong UPTRENDS, pullbacks tend to halt (i.e. act as SUPPORT) at (or near) the rising MA(s).

NOTE: These (MA pullbacks) generally represent the best BUY

opportunities.

5. During strong DOWNTRENDS, rallies tend to halt (i.e. act as RESISTANCE) at

(or near) the declining MA(s).

NOTE: These (MA pullbacks) generally represent the best SELL

opportunities.

6. Following mid Keltner channel band penetration of the MAs, market

reactions/retracements in price back to the MAs are very likely.

7. An upward penetration through a rising MA is considered BULLISH; therefore, good BUY opportunities present themselves when a strong market pulls back

(retraces) down to (or near) its rising MA(s) and holds.

8. A downward Penetration through a declining MA is considered BEARISH; therefore, good SELL opportunities present themselves when a weak market

pulls back (retraces) up to (or near) its declining MA(s) and holds.


The 79 SMA of the closing prices is what we use in our Trading Methodology. The 79

SMA is calculated by adding up the last 79 closes and dividing by 79. The term moving is used because only the latest 79 price bars are used in this calculation. Therefore,

the body of data to be averaged moves forward with each new price bar. The 79 SMA

is a great broad average to use on ANY market and ANY time frame you decide

ultimately to trade.

The 89 EMA is similar to the 79 SMA with just a few minor differences in the

calculations. The 89 EMA is a more sophisticated average that addresses both of the changes leveled against the simple moving average. The exponentially-smoothed

moving average assigns a greater weight to the more recent price action, thus

creating a weighted moving average.


How the 79 SMA and 89 EMA Are Used

Determining the TREND: When the mid Keltner crosses UP through BOTH the 79 SMA and 89 EMA (or 3

consecutive price bars close with their LOWs COMPLETELY ABOVE the upper MA)

and the MFAM is also BULLISH (i.e. signifying an UPTREND), this is telling you that the market is starting a new UPTREND. Therefore, both the moving averages should act

as SUPPORT (a potential BUY zone).


Conversely, when the mid Keltner crosses DOWN through BOTH the 79 SMA and 89

EMA (or 3 consecutive price bars close with their HIGHs COMPLETELY BELOW the lower MA) and the MFAM also is BEARISH (i.e. signifying a DOWNTREND), this is

telling you that the market is starting a new DOWNTREND. Therefore, both the

moving averages should act as RESISTANCE (a potential SELL zone).

This module has been the basis of TREND DETERMINATION – knowing precisely WHEN

and WHERE a TREND will begin and WHEN and WHERE the TREND will end.

Most traders are clueless in knowing what the TREND is. Now, you know exactly what

you need to see in order for a strong TREND to be established. We firmly believe that you need to understand what the true, inherent price structure and natural rhythm of

the markets are. What you’ve just learned here gives you the ability to understand

truly what a market is telling you in terms of determining the TREND. The charts that follow are examples of everything we’ve been discussing so far in terms of

determining the TREND by using the MFAM. You’ll also see again how the Fibonacci

retracements play a crucial role in the MFAM price structure and how the upside and

downside mid-Keltner penetrations through both the 79 SMA and 89 EMA also will help determine the TREND. The next few charts will show exactly what you’ve just

learned. Pictures are worth a thousand words, so let’s take a look at a few chart

examples now.


Trend Determination (UPTREND)

Trend Determination (DOWNTREND)


Trend Change Criteria - UPTREND changing into a DOWNTREND:

2 of the Following 3 Criteria Must Be Met:

1. MRAL (i.e. highest AL in the UP trend) must be taken out to the downside

2. Mid-Keltner Penetration DOWN through both the 79 SMA and 89 EMA (or 3 consecutive price bars MUST be trading COMPLETELY BELOW the lower MA)

3. 62% retracement of the ENTIRE DAY must be taken out to the downside

UPTREND changing into a DOWNTREND


Trend Change Criteria - DOWNTREND changing into an UPTREND:

2 of the Following 3 Criteria Must Be Met:

1. MRAH (i.e. lowest AH in the DOWN trend) must be taken out to the upside

2. Mid-Keltner penetration UP through both the 79 SMA and 89 EMA (or 3 consecutive price bars MUST be trading COMPLETELY ABOVE the upper MA)

3. 62% retracement of the ENTIRE DAY must be taken out to the upside

DOWNTREND changing into an UPTREND


Two other Key Moving Averages Commonly Used as Support & Resistance

I also like to use the 50 Exponential Moving Average (EMA) and the 200 EMA because, quite frankly, they are very common among institutional and many “at-

home” retail traders alike, thus making them a self-fulfilling prophecy. What I mean

by that is… since so many traders watch and use these moving averages, they become very powerful Support (when looking to BUY in an UP Trend) and Resistance (when

looking to SELL in a DOWN Trend). At the very least, utilizing these moving averages

will help keep you from taking otherwise potentially bad trades against the trend of the market.

The 50 EMA acting as SUPPORT in an UPTREND


The 50 EMA and 200 EMA acting as RESISTANCE in a DOWNTREND

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Trading Success Principles Keltner Bands & Key Moving … · © Trading Concepts, Inc. Trading Success Principles Keltner Bands & Key Moving Averages