A volatility based 'envelope' indicator that measures the movement of stock in relation to an upper and lower moving-average band. This indicator, named after Chester W. Keltner, is used by sophisticated investors to predict the trend of the market. An overbought occurs when prices move above the upper band, and an oversold occurs when prices move below the lower band.

The channel is simply based on my ten-day moving average trading rule
Chester W. Keltner
Use in Trading

I like to use the overlay of a Keltner Channel and Bollinger Bands as a momentum trade entry setup. I use a momentum oscillator (MACD histogram) to give an indication of direction. Once the Bollinger Bands enter inside of the Keltner I wait for the subsequent reverse in direction and explosion out of the Keltner Channel as illustrated below. I watch for closing prices above the 20MA for longs and below the 20MA for shorts.

Below is a daily chart of AAPL for reference. Note 1) the 200ema (redline) is pretty much flat. In this case I trade the upper and lower Bollinger Bands, long at the bottom and short at the top. The trend is down so this was a countertrend scalp that turned into a swing. 2) stochastic was oversold and gave a crossover confirmation for my long. As a side note I generally do not take a long in this situation as price is below the 20MA. The hammer is what caught my attention on this trade. 3) On the crossover we saw buyers take control which resulted in a hammer reversal candle.

AAPL BBands Daily small

The hourly chart is below with the same horizontal support as the daily chart referenced above. I've added the Keltner Channel overlay.

Note the hammer that began on Friday the 16th. Buyers stepped in and pushed prices up the rest of the day then AAPL flagged. We gapped up on Monday and finished at the highs. On Tuesday AAPL consolidated sideways. MACD histogram shows momentum waining and Bollinger Bands began to squeeze. I like to add two arrows for reference on my charts for later examination.

Note, red lines are the Keltner Channel and yellow lines are the Bollinger Bands to aid in recognition. 1) momentum peaked on the 19th as Bollinger Bands and volatility expanded. Note the peak in the histogram 2) As prices began moving sideways the Bollinger Bands and volatility subsided. 3) Bollinger Bands enter the Keltner Channel. We wait for confirmation of direction knowing that the daily Bollinger Bands are already setup to run from bottom bands to upper bands as discussed above. Prices are above the 20MA and touch the upper band. At this point a trader could scale in with a partial long.
The Setup

Keltner BBands 1 small

The Trigger

Below, the hourly chart triggers as Bollinger Bands explode and move in the opposite direction and eventually outside the Keltner Channel. This would be the place to add to your position. My exit is the point which price moves outside the upper Bollinger Bands and then reverses and moves away signaling profit taking. The MACD histogram confirms the decision to exit. The preceeding was a short swing or scalp. The trader could also take partial profits and continue to ride this trade higher so long as prices do not close below the 20MA or centerline of the Bollinger Bands.
Keltner BBands 2 small

About Cousin Vinny
Cousin Vinny is the internet pseudonym for TLLeBlanc, Architect who started trading in 1987. Practicing Architecture for over 30 years, Mr. LeBlanc found the technical aspects of building, design and construction prepared him well for fundamental and technical analysis.

He is a family man, a native of New Orleans, currently residing in New Jersey.
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