I highlighted the areas where the Squeeze goes negative. Notice how they coincide with the Bollinger Bands moving inside the Keltner Channel on the price chart. You may also consider displaying the Squeeze as a histogram instead of a line, which I find makes it easier to read which you can see below. As I stated earlier, the Squeeze indicator is not a Holy Grail. It is instead one more tool for your trading arsenal to help you stay out of choppy trading periods.
Use it as a filter in conjunction with other indicators to enter a trade, or use it as one of several setup indicators. For example, as a Bollinger band squeeze trade strategy, if you are day trading on a five-minute chart, apply the Squeeze to an hourly or four-hour chart and use that as your chop indicator. You will miss out on some winning trades, but consolidation on higher time frames typically yields very choppy trading on the lower time frame. Trading in choppy markets can be hazardous to your trading account.
Calculation
The faster you can determine this market state, the faster you can sit on your hands and preserve your trading capital. Download the NPSqueeze Indicator. Bollinger Bands Explained Bollinger Bands are a trading indicator from John Bollinger and are the first component and they measure the movement of closing prices around a moving average.
The moving average is the middle band. Keltner Channels Keltner Channels are the second component and they are similar to Bollinger Bands in their appearance and usage. Trading The Bollinger Band Squeeze Whenever market volatility decreases and our strong trends begin to slow, we see the Bollinger Bands tighten while the Keltner Channel remains relatively constan t.
Also, Keltner Channels use an exponential moving average, which is more sensitive than the simple moving average used in the calculation of the Bollinger Bands. Keltner Channel indicator is designed to contain a large part of the price action. However, traders should not take this signal for granted.
When traded incorrectly, false breakouts of the Keltner channel occur frequently. In order to spot a valid breakout , a trader requires solid knowledge of support and resistance.
Trading with Keltner Channels
You must identify if the breakout occurs near a relevant area of support and resistance. A breakout of Keltner channel is valid only if coincides with the breakout of a relevant support or resistance level. Also, it is advisable to confirm the breakout with other indicators , just to be sure you will not get whipsawed. If you are a trend trader, divergences should be one of your most important tools.
A divergence signals momentum coming into the main trend, suggesting a reversal or possible continuation in the main direction of the trend. Combined with the Keltner channel, divergences offer excellent entry points in the direction of the main trend. By plotting 2 channels, we have a better visual of the trend.
The long-term exponential moving average filters a lot of market noise. When we see the price moving inside the Keltner channels, we determine that the market trades sideways. For this setup, we want the price to break below or above the bands, and stay that way during long periods. Once the price closed below the Keltner channels, we begin searching for divergences.
Keltner Channel PRO Trading Strategy: Day Trading Tips
We are only interested in short entries, so we look on the upper side of the Stochastic Oscillator. The stop loss placement depends on the style of the trader. You could place a stop loss on the other side of the Keltner Channel. Or you could use the penultimate band as a stop loss. We look for the price to stay as much as possible above the Keltner Channels. As you can observe, we found 5 divergences. We enter long once the Stochastic indicates a buy signal.
Look at the chart above. When you see the price moving from one side of the channel to the other, this is a sign of market indecision. This is also confirmed by the slope of the Keltner channel. Keltner Channels are a useful enhancement for eliminating whipsaws when trading trends with a moving average system. Please enable Javascript to use our menu! Alternatively navigate using sitemap. Keltner Channels also known as "Keltner Bands" Chester Keltner, in his book How to Make Money in Commodities , plotted channels as a multiple of daily range high - low around a moving average of Typical Price.
Mouse over chart captions to display trading signals. Keltner Trading Signals First, identify whether price is trending or ranging. Ranging Market The theory is that a movement that starts at one price band is likely to carry to the other. Go long when prices turn up at or below the lower band. Close your position if price turns down near the upper band or crosses to below the moving average.
Go short when price turns down at or above the upper band.
Close your position if price turns up near the lower band or crosses to above the moving average. Trending Market Keltner believed that a close above the upper band, or below the lower band, is evidence of a strong move and should be traded as a breakout. Go long when price breaks above the upper band.
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