By Taro Hideyoshi
There are a number of channel trading systems commercially and non-commercially available. Some have shown good profits and are based on exact mathematical rules. Others involve some judgment in trading and cannot be programmed.
In this articles, we will get to know two of channel trading systems, Keltner Channel and Bollinger Bands
Keltner Channel
The keltner channel named after Chester Keltner who might be considered as one of the earliest system traders. He introduced a system call the 10-day Moving Average Rule in his book “How to Make Money in Commodities” which was published in 1960. It is a simple system that uses a constant width channel to identify buy/sell signals.
The rule of Keltner Channel are:
1. Calculate the daily average price (high+low+close)/3
2. Calculate a 10-day average of the daily average price
3. Calculate a 10-day average of the daily range
4. The daily average range is added or subtracted from the 10-day moving average to form a channel
5. Buy when the market penetrates the upper band and sell when the market breaks the long band
Bollinger Bands
The bollinger bands, developed by John Bollinger, is based on using two standard deviations as a band above and below a moving average. The concept is to buy when the market penetrates the upper band and sell when the market penetrates the lower band. The width of bollinger bands is based on market’s volatility. If volatility increases, the bands will be wider. If volatility decreases, the bands will be narrower.
The bollinger bands are great for immediately sizing up a market. A quick glance at a price chart will tell you trend, volatility and overbought/oversold conditions. A market above one standard deviation is overbought. If shove two standard deviation, it is extremely overbought. The exact opposite for oversold.
The market is usually traded in this manner:
1. If the market is oversold, keep looking for patterns on which to buy.
2. If the market is overbought, keep looking for patterns on which to sell.
As market are in a trading channel mass of the time, the focus will be trading back and forth across these channels.
There are many other channel trading systems. For example, Donchian Channels or Turtle system which is a breakout from a highest high or lowest law of a set number of days. Some of these systems can be programmed. Others require some judgment.
Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.
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