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.
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.
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.
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.