Key Points / KC (Keltner Channels & BB/KC Squeeze)
KC, or Keltner channels, are a technical analysis tool used to chart the relative volatility of a market. The tool was developed by Chester Keltner, and is remarkably similar to Bollinger bands in that the Keltner channel paints a moving average with two bands of either side of the price action.
Keltner Channels: What are they and how to use them
Unlike the BBands, Keltner channel uses the ATR, or average true range, to paint the upper and lower boundaries of the “usual”, balanced price action. BBands use the standard deviation for that.
Keltner channels can be used in any market, but they are most popular in the Forex market.
Just like with BBands, this has to do with the fact that band indicators that oscillate around a mean are great for pair markets - currencies and cryptocurrencies.
How to interpret Keltner on charts
KC is the pink dotted channel. Pine Script: Bollinger Bands and Keltner Channel (BB and KC) by AsyrafDaud on TradingView
In broad strokes, the interpretation of Keltner channel is not much different from how you read the BBands. The band in both cases delimits the area in which the price action tends to stay. If it’s trending strongly, it will get quite far out of the band but eventually it will correct to some place inside it.
In this way, Keltner channels just like Bbands help traders identify whether a market is ranging or if it is trending.
A ranging market has bands of uniform width. Market mostly bounces off the outer bands rather than from the moving average in the middle.
A trending market will have the price shoot to an outer band and then correct, but often the correction will only reach the middle band and bounce there. Another sign of a trending market is the variable width of the bands; they will first get squeezed to extreme narrow width and then they’ll get very far apart.
The BB/KC squeeze: A more precise trading setup
The BB/KC squeeze is short for the BBands and Keltner channel squeeze.
Any squeeze in either Bollinger bands (BB) or in Keltner Channel (KC) is a trading pattern that occurs when the bands get close together. This shows that the volatility on that market is extremely low. The next step is generally a breakout, in other words a period of high volatility, which will widen the bands.
You can build either a BB or a KC squeeze into your trading strategy as a tool that helps you time an approaching move.
Then there is a BB/KC squeeze as a separate tool, which brings a small improvement.
When you see both the upper and lower Bollinger Bands going inside of the Keltner Channel, only then you even consider trading the squeeze. This is when you look to other indicators and on fundamentals to decide on the direction of the breakout.
When later the BBands start coming out of the KC on either side again, that’s the time to enter the position.
Why is the BB/KC combo useful in crypto
The BB/KC is a known tool among scalpers and other short term traders. It’s one of the tool that adds a definitive point of entry into your strategy.
Without the combo of BB and KC, there is usually not enough information for a setup in the short term - the bands change width all the time, it’s near impossible to tell if the market is ready to break out yet.
And then especially on shorter timeframes, the squeeze often doesn’t even get so tight. There’s just not much to trade on, really. Most technical analysts wouldn’t even call that kind of narrowing a squeeze.
Well, the joint tool of BB and KC provides the missing data point.
If you use TradingView FREE with the limited number of indicators, use this script that plots both BB and KC in a single indicator:
- Bollinger Bands and Keltner Channel (BB and KC) by AsyrafDaud on TradingView
You may still find BB/KC useful even if you are not a scalper. Using both BB and KC makes the timing more accurate, you will enter your position a shorter time ahead of the breakout.
Crypto traders have been using the BB/KC squeeze in the past bear markets and it does work well in the flat, drawn-out bottoms of the bear where nobody cares about crypto anymore.
As explained before though, neither BB, KC nor their combination gives any information on the direction of the breakout. If you want to speculate on the direction during a BB/KC squeeze, you will need to use other indicators to give you the idea of what the odds are for either direction.
Using KC with other technical indicators
Keltner channels can always be used in conjunction with other technical indicators to help make trading decisions. They can also be used on their own to identify potential trade opportunities.
Some of the most popular technical indicators that can be used with Keltner channels include Moving Averages, MACD, and various RSI variations.
These indicators inform you about momentum of the market which can help confirm whether a security is in a trading range or trending.
Best Trading tools for Keltner Channels trading
- Trading Platform: Bitfinex
- Charting App: TradingView
- List of tools for crypto traders with more options
Keltner Channels are available in Tradingview.
Get your FREE TradingView account here to access the charting app.
An indepth look at KC (Keltner Channels & BB/KC Squeeze) is here.