Starc Bands And Keltner Channels

As discussed in Chapter 9, banding techniques have been used for many years. Two types that I prefer are based on the Average True Range. Despite this common factor, these two types of bands are used in very different ways. Average True Range is the average of true price ranges over x periods. True Range is the greatest distance from today's high to low, yesterday's close to today's high, or yesterday's close to today's low. See Welles Wilder's New Concepts in Technical Trading Systems.

Manning Stoller, a well known expert in the commodity business, developed the Stoller Average Range Channels or stare bands. In his formula the 15 period Average True Range is doubled and added to or subtracted from a 6 period moving average (MA). The upper band is starc+; the lower is stare-. Movement outside of these bands is uncommon and indicates an extreme situation. In this manner they can be used as trading filters. When prices are near or above the starc+ band, it is a high risk time to buy and a low risk time to sell. Conversely, if prices are at or below the stare- band, then it is a high risk selling zone and a more favorable point to buy.

The weekly continuation chart of gold futures (Figure A. 5) is plotted with both the starc+ and stare- bands. In Feb. 1997 at point 1, gold prices slightly overshot the stare- band. Though the price action was weak, the stare bands indicated that this was not a good time to sell. By waiting, a better selling opportunity was likely to occur. Just three weeks later gold was $22 higher and at the starc+ band (point 2). Point 2 was a low risk selling opportunity. In July (point 3), gold prices dropped well below the starc-band, but instead of declining further, prices moved sideways for the next 12 weeks. Gold prices then started to move lower from November to December 1997 and touched the stare- band three times (points 4). In all instances prices did stabilize or move higher for 1-2 weeks. These bands work well in all time frames even as short as 5 to 10 minute bar charts. Stare bands can help the trader avoid chasing the market, which almost always results in a poor entry price.

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Weekly gold price with stare bands

Upper line = starc+

Middle line = 6 week average

Lower line = starc-

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Figure A.5 Stare bands plotted around a 6 week moving average of weekly gold prices. Points 1 and 3 show prices bouncing after dipping below the lower band. Point 2 shows prices falling after rising above the upper band.

The Keltner channels were originally developed by Chester Keltner in his 1960 book How to Make Money in Commodities. Linda Raschke, a very successful commodity trader, has reintroduced them to technicians. In her modification, the bands are also based on the average true range (ATR), but the ATR is calculated over 10 periods. This ATR value is then doubled and added to a 20 period exponential moving average for the plus band and subtracted from it for the minus band.

The recommended use of the Keltner channels is much different from the stare bands. When prices close above the plus band, a positive signal is given as it indicates a breakout in upward volatility. Conversely, when prices close below the lower band, it is negative and indicates prices will move lower. In many respects, this is just a graphical representation of a four week channel breakout system discussed in Chapter 9.

Figure A-6 is a daily chart of March 1998 copper futures. Prices closed below the minus band in late October 1997 at point 1. This indicated that prices should begin a new downtrend and copper prices dropped 16 cents in the next two months.

Daily copper prices with Keltner Channels

Upper line = plus channel

Middle line = 20 day exponential average

Lower line = minus channel

Daily copper prices with Keltner Channels

Upper line = plus channel

Middle line = 20 day exponential average

Lower line = minus channel

Figure A.6 Keltner Channels plotted around a 20 day exponentially smoothed average of daily copper prices. With this indicator, moves below the lower channel (such as point 1) are interpreted as a sign of weakness.

There were many other closes below the minus band during this period. Until prices close above the plus band, the negative signal will stay in effect. The second chart is March 1998 coffee prices (Figure A. 7) and illustrates a positive signal at point 1. After two consecutive closes above the plus band, prices then declined to the 20 period EMA. In a rising market the 20 period EMA should act as support. Several days after the EMA was touched (point 2), coffee prices began a dramatic 30 cent rise in just a few weeks.

Daily coffee chart with Keltner Bands

Figure A. 7 Keltner Channels with a daily coffee chart. Point 1 shows prices breaking the upper channel which is a sign of strength. Notice that after that buy signal, prices found support at the 20 day exponential moving average (middle line) at point 2.

Both of these techniques offer an alternative approach to either percentage envelopes or standard deviation bands (like Bollinger Bands). Neither is presented as a stand-alone trading system but should be considered as additional tools of the trade.

FORMULA FOR DEMAND INDEX

The Demand Index (DI) calculates two values, Buying Pressure (BP) and Selling Pressure (SP), and then takes a ratio of the two. DI is BP/SP. There are some slight variations in the formula. Here's one version:

If prices rise:

If prices decline:

BP = V/P where P is the % change in price SP = V or Volume

Because P is a decimal (less than 1), P is modified by multiplying it by the constant K.

Where C is the closing price and VA (Volatility Average) is the 10 day average of a two day price range (highest high - lowest low).

The Demand Index is included on the MetaStock charting menu.

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  • sayid
    What is difference between starc and keltner channels?
    11 months ago

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