The Keltner Channel and Bollinger Bands

Channels and bands of various origins have been used to study market price movement by day traders from many disciplines.  They have an uncanny ability to point out the obvious, which is not always as obvious as it might seem, that is to say bands and channels can show the volatility and direction of the market and be read at a glance.  They are easily read and interpreted.

Let’s start with the methodology of Keltner Channel.  The Keltner Channel is similar to most channels or “envelopes” in that it uses three lines.   The center line is a moving average set to a specific time period of your choice, and the default on most charting programs is set to ten, though day traders have adjusted this number to their specific needs in a variety of ways.  The outer bands are then calculated by multiplying the center moving average by another number of the day traders choosing, usually 1.5x or 2.0x.  This simple math should point out one major difference between the Keltner Channel and Bollinger bands; the line tend to stay equidistant most of the time.  This makes sense since the multiplication factor produces a linear relationship to the moving average on both outside lines.

The best known day trader who utilizes the Keltner Channels and has published some articles on the topic is Linda Bradford Raschke.  Without quoting her verbatim, if you have the multiples set up for a particular day and most, say 90% of the price action stays within the channel, you would be able to spot overbought and oversold signals to work around.   But this explanation also points out what is, for me, the real weakness in using Keltner Channels.  

How do you know, on a daily basis, which multiples of the moving average to use and, for that matter, what time frame is appropriate for the moving average itself.  I suppose with years of experience you might develop the ability to judge the market and set the appropriate variables, but it sounds like a fairly tall order for a novice trader.  Raschke has done work integrating the Average True Range indicator into the moving average with some success, which seems a more accurate methodology to my way of thinking.  The point is simple, though; the Keltner Channel methodology would take some very specific mentoring to be an effective trading tool for your indicator set.  At best, it serves as a nice filtering device for other primary trading indicators.

The Bollinger Bands, on the other hand, also use a preset simple moving average (SMA) as the center of it’s three line array.  I generally see the Bollinger Band SMA set around 20, but any number will cause a set a bands to be formed and Bollinger, in his book, thought variations on the twenty period SMA in different markets could produce sacrosanct results.  Instead of using a preset multiple of the SMA the Bollinger Bands set the outer lines at two standard deviations from the center line.  The level of standard deviation can be altered, but the generally accepted norm seems to be about two standard deviations.  So we are dealing with a non-linear outer line formation now, since the standard deviation changes in size depending upon the position of the center line.  When the market is consolidating, Bollinger Bands tend to draw very close together, showing a very low level volatility.  Conversely, when the volatility is increasing, the bands will swing wildly away from each other and the width between the outer bands becomes greater.

Contrasting this with the more equidistant demeanor of the Keltner Channel will immediately show the casual day trader the difference in these two indicators.  One is linear, one is non linear, and the reality is that they appear very different on a chart.  Oddly enough, though, I consider the Bollinger Band to be a secondary indicator, though there are trading systems that use them as a primary indicator.   The general rule of thought on both the Keltner Channel and Bollinger Bands is fairly simple: a close outside the channel is indicative of overbought and oversold conditions and hence, there is a potential counter-trend trade in the offing.

My experience has been that the Bollinger Bands are more accurate at predicting countertrend moves.  Again, I would use them as a filter device and see if, in fact, my primary indicators show the same information.  I think you could say the same for the Keltner Channel, which I have used less.

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How To Multiply Your Forex Profits Exponentially With The Power of Bollinger bands

In the late 1980’s a man by the name of John Bollinger created a tool to measure volatility he called Bollinger bands.  Becoming a favorite among many, these bands provided a visual reference to price action relative to its mean.  Although simple in concept who would have ever thought so much insight could be gleaned from this incredible indicator. 

Three Important Bollinger Bands 

The  bands consist of a center graphing of a simple moving average (21 period), with the concomitant plotting of bands above and below representing two period standard deviations, which would represent the relative range trading has occurred. 

Classical statistical analysis cannot be applied to the closing prices of investments.  This results from the fact that individual foreign exchange closing prices, for example, do not follow stochastic distribution processes.  This is because foreign exchange prices are not normally distributed. 

The calculations in determining the standard deviations for foreign exchange prices can only be regarded as an uncertain estimate of a true standard deviation.  Because prices are constantly moving depending on volatility, they cannot be viewed as fixed parameters needed for classical statistical theory.  What Bollinger has done, nonetheless, is to offer a new technique to the investor to gauge volatility. 

Trading Signals via Bollinger Bands  

Some investors view the breaching of an upper or lower Bollinger band as a standalone trading signal in order to undertake a position.  As such, these events can be awarded inordinate significance.  Studies have shown penetration of Bollinger bands can occur up to 15% of the time. 

Not all of these events, however, are followed by a continuation of price movement in the direction of penetration.  Consequently, in order to improve performance in the trading of foreign exchange currencies, one would want to add additional confirmation signals before undertaking a position. 

Popular Bollinger Band Strategies for Forex 

Considering that most prices will fluctuate within Bollinger bands, many Forex traders buy when prices are near the lower range band and reverse their position when prices subsequently move to the moving average or higher.  

Bollinger bands can effectively be used especially in conjunction with other indicators to determine trend reversals, as well as entry and exit points.  One indicator that becomes extremely beneficial for trading foreign exchange with the use of Bollinger bands is the Relative Strength Indicator or RSI.  

Using Bollinger bands with RSI confirmation, one would short the currency if penetration of the upper Bollinger band occurs, while the Relative Strength Indicator is simultaneously showing weakness.  Under this circumstance, an investor would anticipate the price to fall and would exit upon reaching the lower Bollinger band or before.  

One would do the opposite, if the currency price went through the lower band, and yet the Relative Strength Indicator showed strength.  At this point, an investor would undertake a long position in the currency in anticipation of a minimum movement of back up to the moving average level. 

There is no absolute certainty in foreign exchange trading, but with the prudent use of tools such as Bollinger bands and the Relative Strength Indicator, any individual can greatly improve performance.

Hands down, Bollinger bands are the best indicator to trade with. Their use for buy and sell signals, is vast and extremely accurate. Visit our site for 6 free videos on how to master this incredible indicator. http://www.bollingerbandgenius.com

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Bollinger Bands 101 – Every Traders Dream Come True – How To Use The Bands To Line Your Pockets!

Created by Mr. J Bollinger these bands allow any trader to instantly see price on a chart relative to its volatility mean.  They say that more than price action itself volatility will revert to the mean.  The question becomes – when?  Hence the concept of standard deviation… 

The Appeal of Bollinger Bands 

The attractiveness of the use of Bollinger bands to any investor is in its ability to quantify relative price levels and volatility.  When used in conjunction with price action movements and other indicators, this investment tool can generate signals that foreshadow significant moves allowing for profitable trading opportunities.  

When used in its most simplistic fashion, this indicator is considered an excellent signal to determine if the investment under consideration is oversold or overbought.  When prices touch the upper Bollinger limit, this signifies there is an opportunity to consider concerning the sale of the investment.  Conversely, when prices reach the lower limit, the standard practice is to consider taking a long position. 

The Market Psychology of Bollinger Bands 

As these bands are so widely viewed in the marketplace, anyone considered trading activity should be aware of the significance when prices approach upper and lower band limits, as these are the most common entry and exit points for market participants.  

More often than not, one can visually confirm on a historical price chart that prices tend to reverse themselves when activity reaches the levels as represented by Bollinger bands. In addition, penetration of the bands and continued movement in the direction of penetration usually entails growing momentum for continued upward or downward movement.  When used in conjunction with other confirmation signals, the reaching and/or penetration of the limits represented by Bollinger calculations have shown themselves to be excellent opportunities for profitable results. 

Most Effective Use of Bollinger Bands 

The most recommended method of using Bollinger band signals is to undertake positions after a period of time in which the bands have been relatively narrow.  The longer such a time has existed, the greater the likelihood that a penetration will occur and continue in the direction of the breakout, especially if this event occurs in the direction of the previously established longer-term trend. 

Another useful signal would be the occurrence of a relative top or bottom in prices outside the band, followed immediately by trading in the opposite direction within the established band limits.  This is viewed in the marketplace as a good preliminary indicator that a reversal in price trend is about to occur.

Bollinger bands, although not originally designed to be a primary trading signal technique, do offer opportunities for the astute investor to identify high profit probability entry and exit points for successful trading.  These types of results will only be enhanced when Bollinger bands are used in conjunction with other indicators.  Regardless of the market, Bollinger bands are indispensable in developing trading strategies.

Bollinger bands are by far the single best indicator to master. Their use for buy and sell signals, is vast and extremely accurate when applied properly. Visit our site for 6 free videos on how to master this incredible indicator. http://www.bollingerbandgenius.com

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Automated Stock Trading – Automatic Stock Market Trading System

An Automated Stock Trading System is a process that makes assessments about the stock market based on historical performance patterns. There are all kinds of systems that can be purchased, but it is very instructive to build your own, and as your own system grows, it will begin to develop your personal trading style along with it. In the end, you will have a stock selection system that you understand, that matches your investment style and needs, and that hopefully will enable you to pick more winners than losers.

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The first component of a trading system is input data. There are many places where you can purchase this data. A free source is Yahoo! Finance. Go to Yahoo! Finance. Type a stock into the little box and click Get Quotes. When the quotes show up, click on the Historical Prices link on the left-hand side. Now you can specify exactly what date range you’d like history for. When you get the results, go to the bottom of the page and click on the link called “Download to Spreadsheet.”

Most people split their data into two groups. Group 1 is the backtesting group. This could be, for example, three years of data from 2003 – 2006. With Group 1 you develop your patterns.

Group 2 is your validation group. After developing patterns using Group 1, you test them out in Group 2 to see if they still perform well. This group could be, continuing our example, from 2007 – 2008.

Once you’ve downloaded your data and put it into spreadsheets, you then add columns and calculate all the various indicators, such as running averages, MACD, and Bollinger Bands. How to calculate these is a topic for another article.

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The second component of your trading system is patterns. A pattern is a collection of how stock prices and indicators move relative to each other. A simple example would be “A stock moves up three days in a row.” You would add another column to your spreadsheet which will have a value of TRUE if the stock went up three days in a row, and FALSE otherwise.

There are buy patterns and sell patterns. Maybe the pattern you’d like to test is to sell if the stock drops 3% in one day. Then you would add another column to the spreadsheet and mark it TRUE whenever the stock drops 3% in one day.

Finally, you need an evaluation process which looks at the two pattern columns, and then simulates buying and selling the stock, and calculating the Return on Investment (ROI) in every case.

The idea is to find a set of patterns that results in an overall ROI that is high enough to make you a profit. A system that returns 1% after 100 trades is not useful in real life, because it won’t cover trading costs. Each person will have their own style of how much money they have to invest, how much risk they can take, and what their trading window (the amount of time they feel comfortable owning a particular stock) is.

Of course, it is time-consuming (not to mention tiresome) to manually do all of this in a spreadsheet. As you develop your system further, it makes sense to start using Excel macros or even to write a computer program to do the analysis for you.

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More Stock Market Trading System Tips:

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Stock Market Index Secret is by Karl Dittman, a 30 year veteran of stock market trading. Karl maps out a really simple ’secret’ formula that can point you at a method of targeting a stock or an index on any day and make a profit. If you follow his patterns, you can can see opportunities to take good profits.

The Secrets of Sucessful Traders Guide was preferred amongst our team of researchers. It offers the most practical stock trading advice for beginners looking to find success in the stock market without losing their house. It is a step by step instructional guide which clearly explains everything you need to know about the industry and is patiently explained in detail to ensure that you are fully aware of how the stock market works before making your first investment.

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Automated Forex: an essential tool for the modern-day trader

Automated Forex is an essential tool in the arsenal of the modern-day trader that provides significant opportunities. Automated Forex is a computer program, which is based on a variety of Forex trading signals that evaluate whether to buy or sell a currency pair at a point in time. This computer program largely advises the trader to make decisions that are based on a set of signals stemming from technical analysis charting tools. The signals then generate a buy/sell decision.

Why Automation?

Automated Forex trading enables trades to be implemented in real time from anywhere in the world, diminishing the losses that result from manual trading. Manual trading is negatively impacted by losses due to the timing delay involved in buying/selling of currency pairs in the volatile and fast-moving environment of currency exchange.

Automated Forex trading enables traders to conduct hassle-free, round-the-clock trades, regardless of the time zones of the markets concerned. These new-generation automation techniques provide greater protection to the trader’s capital, they also save on time and energy. Entry/Exit trades may be executed faster when utilizing the Automated Forex technique, as compared to manual trading.

What to look for in Automation?

One should seek a next-generation automated Forex system that is available on the internet. Trading software that uses Fibonacci tools and other frequently used indicators such as RSI, MACD, Bollinger bands and oscillators, etc., usually give more reliable results. An automated Forex system should also apply principles of several progressive scientific theories, for example those based on the Chaos Theory, Quantum Mechanics, Wavelet Theory and Fractal Geometry. A good automated system is expected to provide the trader signals to profit from short-term as well as long-term currency movements. It should also enable one to set and then achieve realistic profit goals.

Forex robots, a popular Forex Automation trading tool, are aimed at eliminating the psychological element of trading, which may prove to be detrimental at times.

The Forex Application Program Interface program, which is another key automation tool in the world of Forex trading, enables its users to: receive a real-time Forex API rate feed, set and modify stop-loss, submit trade requests and undertake profit orders.

For those involved in currency trading, Automated Forex day trading would certainly be a welcome addition in an already attractive investment vehicle.

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