Welcome to this tutorial on Keltner Channel Trading Strategy and the keltner channel breakout system Bollinger Band and the Squeeze. See the 10 minute video below for the full tutorial.
We’re going to do a little comparison between these two types of envelopes. They are called envelopes because the lines envelope above and below the midline and the midline in this case. We’re going to use as the 20 period moving average which is right here.
So right now I have it as you can see the Keltner Channel on here. We’re looking at a Disney daily chart. And one of the big differences between the Keltner Channels. The Bollinger Bands are the Keltner Channels for mt4 and other charting platforms use an average true range to set the channel distance.
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So these are the channels here, and then we’ve got a 20 period moving average here in the middle. And by the way that is a 20 period exponential moving average. That’s typically what’s used for Keltner Channels.
Now Bollinger bands, they are calculated differently instead of using an average true range so when people use this as a trend indicator. Primarily what they are looking for is for it to show an impulse move here, strength to the upside, hit the upper Keltner Channel. Now see here it did not and but here it does so that shows a strong impulse move to the upside. Then we are looking for it to not to come back and retrace and it hit the bottom channel in order to maintain strength to the upside.
KELTNER CHANNEL TRADING STRATEGY
And that philosophy in general, I agree with. Big part of my trading is looking for the direction of that dominant energy in the market and this would be one way of doing it. So that works very well here in this particular situation. Let’s look at another one.
So as you see here, we had been in a downtrend and then we come back, we reverse, we hit the upper Keltner Channel. The market does continue up and up and up, and then it comes back down, and well let’s move the screen forward here. You can see and so in this case, actually we’ll just go ahead and move it all the way forward. And you know it looks pretty great for a keltner channel breakout system.
It does come down and hit the lower Keltner Channel and does not come back and reach the upper one, and continues with a nice downtrend. So that’s the basic use of it, the basic way of reading it. And it works pretty well if you got a market that is having a rather low volatility trend, and Disney tends to move that way. However not all markets do. So let me show you some other examples. I’ll just, I’ll show you one more.
SCALPING WITH KELTNER CHANNEL
Now I’ve brought up GLD, so just as a different example. This one we hit the lower line. Now we go back up, hit the lower one here. And so that would indicate an impulse move to the downside but then we have one that hits to the upside which is what we don’t want in order to start a downtrend. But then it really goes down.
By the way other thing to notice is look how far price bars get below the line in the keltner channel trading strategy. So it doesn’t, if you get a high volatility market or particular time at any market, it’s not going to contain price action very well, Bollinger bands do a better job of that. One way around this however in some softwares, some software programs, you can do multiple multipliers. Well that’s good, multiple multipliers.
KELTNER CHANNEL MT4, EXCEL AND OTHER SOFTWARE
You could do, instead of just having one offset multiplier here, you could do 2, you could do 3, and that will help. A lot of people actually do that, and that’s good then you’ll have 2 bands above the mid-range, and 2 bands below the mid-range. So that’s one way to real help to answer that problem. But again you see that we go down here, well below and then we come back up well above and then we go back well below.
And so this is one of the problems and one of the reasons that I said I don’t like using this as a trend indicator is because it’s typically based on 20 periods. 20 period exponential moving average. And 20 bars is not enough to have a trend in my opinion. But word trend means in the Webster’s Dictionary, ‘The Extended General Direction of something.’ So trend by definition is a long term move, not a short term move. I think 20 period is too short of a term to measure trend. I like to go with 50. And obviously there’s really different opinions about it, that’s no problem, but that’s my opinion. And so down and down and down we go.
KELTNER CHANNEL BOLLINGER BAND AND THE SQUEEZE
I am in the Bollinger bands now. They are the red envelopes here and here. And you’ll see I am using essentially the same settings. Even though the equation is different, so I am using the same settings essentially that I did for keltner channel trading strategy. Again the equation is different, so that’s why obviously they are different.
One thing you’ll notice right away is that the Bollinger Bands, the red lines are able to capture more or contain more price action than the Keltner Channel. The Bollinger Bands they will expand and contract more. That’s because they are not based on average true range, they are based on the standard deviation which varies, so they measure volatility much better in my opinion. Use them more for volatility than I use them for trend, again we are using a 20 period moving average, so I wouldn’t use it for trend. But for volatility I think it is very good.
Also couple of another thing that I like about the Bollinger bands is that not only do they contain price action or more price actions, so for example here, you just get three bars above the Keltner Channel, but here is the signal that I use a lot where you get a real body outside of the Bollinger band, and to me that shows extreme move.
KELTNER CHANNEL PARAMETERS
A very very unusual high volatility move that is generally unsustainable. So the keltner channel trading strategy doesn’t show you that because you get so many bars above and below it all the time. And but you don’t get as many bars above and below the Bollinger bands, and so it’s an usual activity and when it is, it’s usually measuring exhaustion. And that’s very valuable information, very valuable.
So as we come down here for example, we see that yes we are hitting the bottom here. The 2 levels are pretty even, but as volatility increases, the Bollinger bands start to move apart. That’s a, that’s a signal of increased volatility.
Something that the Keltner Channel doesn’t give you. Then when we get down to here, then this is very important, notice that all these bars here, all those bars are below the Keltner Channel but only these couple of bars here are below the Bollinger band. When I see that, then I say, oh okay Bollinger band captures the vast majority of price action and because now we have gone down so far that we’ve broken below that.
KELTNER CHANNEL TRADING STRATEGY CONCLUSION
I think we are coming to the end of that move. And that is a great signal that works a lot, and there you go. So it comes back up and that is the end of that down move, end of that trend, if you want to measure trend that way.
BTW, if you’re interested in the indicator that I use personally for very precise entries and exits. I’m happy to share that with you. Just send me an email at Barry@TopDogTrading.com, and I’ll show you how to get access to that indicator.
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