Are Keltner Channel Bounces Worth Trading?

SP:SPX   S&P 500 Index
Since I tested Bollinger Bands in the last article, what’s natural to think of testing next?

Rubber bands? Rock bands?

No, you silly goose! Keltner Channels…

What’s the Difference Between Keltner Channels and Bollinger Bands?

Bollinger Bands are based on chunks (called “standard deviations”) away from an average.

Keltner Channel bands are based on multiples of the average true range (ATR) away from the average.

Alrighty then. Let’s get into our test setup…

The Trading Truth Test Setup

We’re keeping this the same as our Bollinger Bands test, except for the ATR period.

Since we’re using ATR to determine the Keltner Channels, we’re going with the same period as the moving average.
Market: the S&P 500 index (using SPY to trade it, assuming SPY is exactly 1/10th the S&P 500 Index price)

  • Timeframe: Jan 2, 2008 to March 28, 2023

  • Bar interval: 1 hour

  • Moving averages: 50 bars (simple moving averages, meaning every bar gets equal weight, unlike with exponential)

  • Average true range: 50 bars

  • Starting Equity: $ 25,000

  • Max % of Equity Per Trade: 3%

  • Commissions, fees and taxes. To keep things super simple, we’re assuming these are all zero.

Our 2 Tests

Test A:

We’re using Keltner Channel bands 2 ATRs away from the moving average.

Any time a high pierces the upper Keltner band and then a high is below the band, go short (if we’re not already in a trade).

Any time a low pierces the lower Keltner band and then a low is above the band, go short (if we’re not already in a trade).

This way, we’re waiting for a cross back over the band after it gets pierced.

We didn’t do this for our Bollinger Bands tests, which makes this not a direct performance comparison.

Test B:

The same as Test A, except we’ll use Keltner bands 3 ATRs away from the MA instead of 2.

The Test Results

Test A's equity ended at $ 38,137.63, up 52.6%. The biggest loss from the initial $ 25,000 deposit was $ 843.16, a 3.4% loss. The maximum losing streak was $ 1,805.75 or 6.36%.

Test B's equity ended with $ 34,435.71, up 37.7%. The biggest loss from the initial $ 25,000 deposit was $ 3,027.42, a 12.1% loss. The maximum losing streak was $ 2,080.71 or 8.22%.

The worse results 3 ATRs away from the MA is surprising. Seems like that’d give us higher-quality trades.

Even Test A’s numbers don’t come close to what plain-Jane buy and hold did: ending up 173.1%.

Note: I did this analysis in a spreadsheet, with exported TradingView data. If you see any errors, please let me know.

What Test Tweaks We Could Make

Some traders wait for when Bollinger Bands or Keltner Channels get pinched (narrower in width). That’d be interesting to test vs bounces.

One well-known trader, John Carter, looks for when Bollinger Bands go inside (“squeeze into”) Keltner Channels. He sees that as an indicator of bigger-than-normal moves.

What would you test? And what else would you like to see tested?

Comment below!


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