Keltner channel and my new trading strategy!

Recently I have developed a simple trading strategy that uses Keltner channels. Actually, I am not a fan of indicators because they result in a large number of trades with huge drawdowns. However, this strategy does not have these drawbacks!

But before I tell you about this new strategy, we can have a look at two other well-known strategies.

In the first strategy, we buy a stock when the price closes above the upper band of a channel, and then we sell if it closes below the lower band. An example of a successful trade we can see here (with 10-days moving average and the multiple is 1.5):

KeltnerBreakout

(Source: NinjaTrader)

I backtested this strategy on S&P 500 stocks during the past 20 years. I assume that if “yesterday” the price closes above the upper band, I will buy on open “today” with a stop-loss located 1 USD below the low of “yesterday”. Alternatively, I wait until the price closes below the lower band (as depicted in the figure above) – if it happens, I sell tomorrow on open.

How good is this strategy? Well, the maximum drawdown is really large (around 44%). The percentage of winning trades is only 37%, but the win/loss ratio is more decent and equal to 1.9. Average holding time is 26 days and an average trade gives us 0.56% income. The profit factor is 1.14. I cannot say that the result is outstanding. Of course, this can be changed by e.g. playing with the stop-loss (like putting it lower so that it is not so tight), but I do not think the performance will significantly improve.

Let us try another well-known strategy, where we buy if the price touches the lower band. Then, we close the trade if the price penetrates the upper band. Also, I will put a stop-loss 1 USD below the bar that touched the lower band. The figure below shows us two such cases. The case on a right is a successful trade, and the case on the left is a losing trade:

KeltnerTrading

(Source: NinjaTrader)

The backtesting (using the same set-up as previously) results in 49% profitable trades but the win/loss ratio is only 1.2. The maximum drawdown is also large and equal to 33%. The profit factor is 1.20, which is slightly better than previously. The average holding time is only 11 days with an average income 0.52%. So, it looks better, but still nothing special.

What about my strategy then?

At first, we can have a look at the backtesting: 64% of profitable trades (!!!) with a win/loss ratio of 0.8. The win/loss ratio is certainly lower than for the aforementioned strategies, but this is compensated by the much higher percentage of profitable trades. But the most important: the maximum drawdown is only 5% (extremely low). The holding time is 17 days (so something between these two strategies shown above), but an average trade is 1.12% (so around twice as more!).

My new strategy is not perfect, but it has a huge advantage: it is very simple, and anyone can use it by just drawing the Keltner channels (i.e. no chart patterns, trendlines, etc – that require experience and time).

I guess you are curious to hear more about the strategy and the set-up?

For only 39 USD, you will receive more details! Just make contact.