One weakness of the strategy of price crosses its moving average, is the many whipsaw, closing the position at a loss before the trend has a chance to settle. This is why trading slope of the moving average gives better results; It takes position when the trend is sufficiently established.
The whipsaw is a component of market volatility. One way to avoid them is to create a band of volatility around the mean. We have already discussed this approach in the article about Bollinger Bands. Indeed, trading the breaks of Bollinger Bands reduces sensitivity to market noise.
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My goal today is to test a trend strategy based on Keltner channel. The rules can be presented as follows:
- Buy: when the price closes above the upper band, buy at the opening of the next bar. Close the position when the price closes below the moving average.
- Sale: when the price closes below the lower band, sell at the opening of the next bar. Close the position when the price closes above the moving average.
- The bands are at a distance of 2xATR from the moving average.
* Average True Range (ATR)
All tests are done with an initial capital of $ 10,000, on EURUSD, for the period from 01-01-2008 to 01-01-2012 and for different time frames (M15, H1, H4 and D1). Volume of trade = 1 mini lot ($ 10K). For each time frame, I vary the period from 10 to 100 with a step of 2. I will present the results of optimization in the form of a curve to see if there is a region where the results are stable.
Optimization results of the period of the moving average
Figure 1 show clearly that H1 and D1 are the time frames that provide the best results. The following table presents the average profit / loss (Average), standard deviation (Std) and the ratio of Average / Std. H1 definitely gives the best results.
Results with optimization of the period of the moving average and the ATR factor
H1 curve shows some stability above zero from the period 40. I wanted to see how this stability could be affected, for better or worse, if we vary the ATR multiplier. This factor was fixed at 2 in the previous test. In Figure 2, we clearly see a stable region around the point (74, 1.5).
The strategy based on the Keltner channel keeps its promises. Positive results on a wide range of time frames (from H1 to D1), with the best at H1. Some stability for the period as well as for the ATR multiplier factor. The presence of a volatile component (ATR) in this strategy gives us some confidence to his ability to hold if the market volatility changes.
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