The trading system that we will explain below is based solely on two indicators, the Keltner channels, and the Bollinger Bands, which are actually quite similar. It is a price reversal system that tries to find the price inversion points.
Therefore, it works best in range markets where extreme value readings of indicators such as Bollinger Bands produce more reliable results. In trending markets where it is more difficult to predict maximum or minimum extreme values, their signals have less reliability.
Since this system uses two well-known and commonly used indicators found in any technical analysis package, it can be used in any trading platform.
Next, we will describe the rules of this trading methodology.
As always, it is recommended to test this system on a demo account before using it to trade with real money.
Configuration and indicators of this trading system
Recommended markets: This trading system can be used in most markets, including Forex, precious metals and indexes, for example. It is recommended that the trader perform backtesting tests in the markets of interest.
Recommended time frames: It is recommended to use this trading system in the 30-minutes timeframe (M30) and with superior timeframes (H1, H4, and D1).
Recommended market seasons: This strategy produces the best results in the sessions of New York and London markets since in these periods the markets show the greatest movements.
System indicators – This methodology only uses two technical indicators:
Bollinger Bands with standard configuration (20, 2).
Keltner channels of 10 periods.
Trading System Rules
As we will see below, the rules of this system are quite simple, but they require the monitoring of the market price action since it is based on the breakdown and rebound of the price at the levels generated by the Keltner channels and the Bands of Bollinger.
Buy trades
A buy position is opened when the following market conditions occur:
The asset price falls and the price bar closes below the lower Bollinger Band and below the bottom line of the Keltner channel.
We wait for the price to bounce, start to rise and close up the bottom line of the Keltner channel.
After this, we open the buy position at the opening of the next price bar.
Short trades
A sell position is opened when the following market conditions occur:
The price of the asset rises and the price bar closes above the upper Bollinger Band and above the upper line of the Keltner Channel.
We wait for the price to bounce, begin to fall and close below the top line of the Keltner channel.
After this, we open the sell position at the opening of the next price bar.
Closing Positions
Stop loss – For this strategy, the recommended stop loss is as follows:
Buy positions: The stop loss is placed below the last swing low.
Sell positions: The stop loss is placed above the last swing high.
Take profit objective – We can close the position with gains when the price reaches the middle line of the Bollinger Bands or the middle line of the Keltner Channels.
Example of the trading system
In the previous image, we have a H1 price chart of the EUR/USD, where there are several examples of buy and sell signals generated by the system.
All signals are shown by arrows that indicate the entry price bars. In addition, the stop loss and take profit are indicated.
For example, in the buy signals, we can observe how the price went down and crossed the lower band of the Keltner Channels and the Bollinger Bands. Once the price bounces and begins to rise, we open the long position once the price closes above the lower band of the Keltner Channel or the Bollinger Bands. In the sell trades, we have the same trading signals, but vice versa.
As we can see in the image, the system produces the most reliable signals when the market moves in range. When there is a strong trend movement, the price reaches the stop loss more easily, since it performs short-term upward or bearish retracements, after which the price returns to the previous direction of the dominant trend, and more easily breaks the maximum (uptrend) or previous low (downtrend) and the bands of the Keltner Channels and the Bollinger Bands.
Therefore, use this trading system preferably in markets that move in defined price ranges.
Related Posts:
Keltner Channel Indicator for Metatrader
Keltner channels - How can we use them?
Trading system with 1-2-3 pattern and Bollinger Bands
Bollinger Bands, compared to Keltner Channels, are more sensitive to market volatility. Therefore, Bollinger Bands are better for short-term trading, while you are better off using Keltner Channels when trading on longer timeframes.
The Keltner Channel is a robust indicator, but it can be complemented by other indicators to provide definitive confluences. One of the best complimentary indicators is the ADX (average directional index), which will help qualify momentous trends and will help identify false breakouts.
Lagging Indicator: Keltner Channels are a lagging indicator, which means they are based on historical price data and may not accurately predict future price movements. False Signals: The indicator can generate false signals, especially during periods of high market volatility or when the price moves sideways.
Interestingly, Bollinger Bands are able to capture about 90% of the price action in a given asset or cryptocurrency. When the asset's price moves above or below a set Bollinger band, this means that trading opportunities are being presented.
Just like a good chef uses different ingredients to make a delicious dish, traders use different tools to make smart decisions. Bollinger Bands are one of those tools. But they work even better when you use them with something called the Moving Average Convergence Divergence (MACD) indicator.
What Is a Keltner Channel Strategy? If the price action breaks above the band, the trader should consider initiating long positions while liquidating short positions. If the price action breaks below the band, the trader should consider initiating short positions while exiting long or buy positions.
Combining the Keltner Channel Strategy and Bollinger Bands into your trading strategies can lead to more accurate signals and higher profits. In fact, studies have shown that this combined strategy has a 74% success rate.
This prompts traders to exit positions if they can see that the markets are moving in an unfavourable direction (surpassing the lower channel bands) and can help to minimise their chances of loss.
The Squeeze indicator measures the relationship between two studies: Bollinger Bands® and Keltner's Channels. When the volatility increases, so does the distance between the bands, conversely, when the volatility declines, the distance also decreases.
False signals: Bollinger Bands can produce false signals, especially during periods of low volatility when the price moves sideways. Traders need to exercise caution and look for confirmation from other indicators.
Keltner Channels are a trend following indicator designed to identify the underlying trend. Trend identification is more than half the battle. The trend can be up, down or flat. Using the methods described above, traders and investors can identify the trend to establish a trading preference.
Ultimately, there's no indicator that guarantees you'll always get in at the bottom or out at the top. However, Bollinger Bands—especially when paired with other indicators such as chart pattern recognition tools—can help you make better trading decisions.
A breakout from either side of the channel may signify strength or weakness in the underlying security. Keltner Channels are a poor indicator with an average 28% win rate.
As a lagging indicator, Bollinger bands can't predict price patterns but instead, they follow current market movements. This means that traders might not receive signals until the price movement is already underway.
Introduction: My name is Greg O'Connell, I am a delightful, colorful, talented, kind, lively, modern, tender person who loves writing and wants to share my knowledge and understanding with you.
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