1. Trend

I recognise trend through price action which is a series of swing highs and swing lows. To help me identifying the correct market direction I use Keltner Channel (aka Keltner Bands) as a trend filter which is a volatility based ‘envelope’ indicator composed of two bands plotted around an exponential moving average. I prefer this indicator to a moving average or an EMA pair because it provides a zone of support instead of a single line therefore it does not require optimization. At the same time the width of the channel gives visual information about the volatility (average true range).

I have to emphasize that I do not use Keltner Bands (or in fact any other indicator) to obtain trade signals. I “only” use it to keep me on the right side of the market.

I consider a trend being intact if the price breaks away from the Keltner Channel to the same direction where the bands have an apparent slope. The price occasionally pulls back to test the Keltner Channel and sometimes violates it. The trend reverses when the price breaks through the channel while its slope changes direction or at least flattens and then the price retraces to test the channel from the new direction.

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