An explanation of my Keltner Channel and Candlestick hybrid setup

This is an explanation of my automated trading strategy for the Dukascopy JForex Strategy Contest in April. This strategy just made its first trade today after running for about 72 hours. My contest demo account closed with a gain of 7% on this first trade. Note that this strategy is built for competing in a contest and not for real trading (i.e., it's purely a no cost gamble). Here is the concept for this high probability trading setup. Referring to Figure 1 below, the red arrow marks my short entry on EURGBP today. These are the technical analysis indicators the strategy uses:

  1. Trend: Signaled by 50 bar moving average above (bullish) or below (bearish) the 200 bar moving average.
  2. Momentum: Oversold or overbought RSI conditions, but not used in a traditional manner...
  3. Volatility: I use the Keltner channel to measure volatility.
  4. Price action: Observe candlestick behaviour to identify trend continuation. This is where the secret to this strategy happens. I will explain this below.

Note that I used a Bollinger Bands in the chart of Figure 1 because I couldn't find the Keltner Channel indicator in Metatrader (my charting software). It doesn't affect my conceptual illustration anyhow. The setup:

  1. Identify overarching trend via 50/200 moving averages as explained above.
  2. Confirm price is still playing to the trend by checking if current market price is on the right side of the 200 bars moving average. Price above for bullish and below for bearish.
  3. Once steps 1-2 are in place, it's assumed that the trend is strong. We look for a setup in the trend's direction. In particular, we look for a failed counter-trend retracement setup using candlestick in combination with the Keltner channel.
  4. Sounds fancy but it's simple. Using a short-side example, the bar's high has to penetrate above the Keltner channel yet it closes within it. Then the short entry is signaled. The opposite for a long-side entry.
  5. RSI overbought and oversold conditions are used to filter out slow and steady counter-trend moves (those are evil).

Another benefit of using a price channel is that I also use it to peg my take profit target and stop loss. As I said in my previous post, because Dukascopy expects winning contestants to submit their source codes, I am not using anything proprietary or extraordinary here. As such, this is totally different than what I use to trade on my own. Namely more reliance on indicators and less on price action and risk management.