- Introduction :
Channels are very useful tools to assess overextended price, and upcoming retracement or impulsive moves (such as squeezes). It is an indispensable addition to any trader using Mean Reversion theory for a scalp-trade or swing-trade.
This script contains :
- 2 channels Keltner-style, using the True Range for
- customizable volatility (channel width) and smoothing period
- a standard selection of moving average ; , ,
- an embedded readjustment of the lower bands to avoid the drop on a logarithmic scale (see explanation below)
- Why another channel indicator ?
I have found most conventional channels to be either not based on "proper" (e.g. standard deviation of price action for ), or the bottom channel to be ill adapted to the logarithmic scale and plunges to 0 on some high periods, messing with readability on logarithmic auto-scaled chart.
Also, I find the channels to be most useful when superimposed with another one of longer length; especially a pair of channels with a 50 and 200 period moving average respectively. Mean Reversion traders that mostly trade the 50 and 200 / know what I am talking about as having a channel helps to have a better visual for a proper of entry and exit point.
- Disclaimer :
This indicator was originally intended to be used along with the Trend Insight System to improve performance, and the default configuration mostly backtested on BTCUSD .
Please use with caution, proper risk management and along with your favorite oscillator, reading and signals system.
- Some explanation :
Based on Mean Reversion paradigm, everything has a tendency to revert back to the mean :
- when the price enters the upper channel, it is supposed to be (or start getting) overbought as the market is getting overheated, thus prone to correction,
- on the other hand, when the price enters the lower channel, it is supposed to be (or getting) oversold and the market looks favorable for a buy-in.
Depending on the trading style used, a trader will usually either wait until the price leaves the channel towards the mean before taking action (conservative style) or you will set limit orders inside the channel as you expect a reversion to the mean (more agressive/risky style).
With two channels, more complex (and maybe precise) rules can be built to optimize one's trading strategy.
- Important notes :
In the end, sticking with 50/200 length and a single setting on might be wiser, be wary of overoptimization which is risky at best and counter productive at worst (according to legendary traders such as Mark Douglas). Even if, needless to say, the needs to be adjusted between a nascent and volatile market (such as crypto) compared to standard call markets that are much less volatile.
- End notes :
It will always be considered a work in progress to help bring out the best of trading with channels, any comment and suggestion are welcomed.