In trading the impressions do not count, numbers count. Analyze the data with method is in fact the first real step to build solid trading strategies, and to do so you need tools that help to read them objectively.
With this goal, today we start from Tesla (TSLA), one of the most followed and volatile stocks of recent years, to build an automatic trading strategy based on a little talked about but potentially very effective indicator: the Keltner Channel.
We will see how it works, because it can be useful and how it can be integrated into a systematic trading logic.
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Characteristics of the Tesla share title (TSLA)
Tesla is undoubtedly one of the symbolic titles of the last decade. His growth was at times dizzying, transforming the Elon Musk company from a bet on the future of the electric car to one of the most capitalized big techs in the world.
In recent years, however, the title has shown a anything but linear trend: large raises have alternated with marked correction phases, putting a strain on the patience of many investors.
Precisely for this reason, the Tesla title (TSLA) is an excellent candidate for testing strategies that know how to intercept well -defined directional movements. And here the Keltner Channel comes into play.
Keltner Channel: a price channel that adapts to volatility
Keltner Channel is an indicator originally developed by Chester Keltner in the 60s. Unlike Bollinger gangs, which are based on standard deviation, the Keltner Channel uses the Averal True Range (ATR), a volatility indicator, to calculate the breadth of the price oscillation range.
The indicator, shown in Figure 1, is displayed as three lines:
- a central line, which represents the mobile average of the price,
- a higher band, obtained by adding a multiple of the AT to the central line,
- A lower band, obtained by subtracting the same multiple as the ATR from the central line.
This approach allows the Keltner Channel to adapt dynamically to volatility, being particularly useful in identifying directional movements.
Figure 1. Graphic representation of the Keltner Channel.
Creation of a strategy to test the Keltner Channel on the Tesla title
To build our strategy we will use the Keltner Channel with the predefined parameters that are on most trading platforms:
- Mobile average period: 20
- Period of the Verso True Range (ATR): 20
- ATR Multiplier: 1.5
Since the stock market is open 6 and a half hours per day, the strategy will be tested on a 30 -minute time frame, in order to obtain a good granularity without generating an excessive number of signals.
Operating logic is very simple:
- Long input: if the closure of a bar is greater than the Keltner Channel upper band, a position is opened to the next bar.
- Short entrance: if the closure is lower than the lower band, a position is opened to the next bar.
- Exit: in both cases (long and short), the position is closed when the price crosses the other band of the channel in the opposite direction.
In this way a long and short strategy is built, designed to test the ability of the Keltner Channel to intercept management movements on both sides of the market. Although historically the equity has a bullish trend in the long run, it is interesting to observe how it also reacts in the weakness phase, especially on volatile titles such as TSLA.
To contain the impact of extreme movements, a 5% fixed stop loss is applied on both Long and Short positions, with the aim of limiting the influence of outliers, or anomalous values, and protect capital.
Results of the Backtest of the Tesla Actions strategy
The strategy has been tested from 2010 to date, using a fixed capital of $ 10,000 per operation. Figure 2 shows the overall equity line (long and short), which highlights a good regularity, especially in the central and final part of the test.
Figure 2. Total equity line of the raw strategy with Keltner Channel applied to Tesla actions.
The total net profit reaches about 70,000 dollars, an interesting result considering the simplicity of the logic used.
However, as is observed in the following figures, a strong discrepancy emerges between the long side and the short side:
- In Figure 3, the equity line of Long positions shows constant and robust growth.
- In Figure 4, on the contrary, the short side has a much more volatile eagle line, with an evident negative trend for most of the analyzed period.
This divergence confirms that strategies on titles with a strong bias bias as TSLA adapt much better to the long.
Figure 3. Equity Line only Long of the raw strategy with Keltner Channel applied to Tesla actions.
Figure 4
Turning to the total trade analysis (Figure 5), we can see that the strategy has generated a total of 1305 operations, with a percentage of profitable trade equal to 39.23%. The data that deserves particular attention is the Averal Trade, or the average profit per operation, equal to 53.22 dollars, or about 0.5% of the capital used for single trade. A value that approaches the minimum limit of sustainability, especially considering the incidence of slippage and commissions. In realistic perspective, it is a discreet base, but which can be improved, for example by introducing additional conditions.
Finally, an anomaly should be underlined that emerges from the same figure: the Largest Losing Trade (the largest loss) is greater than 5%, despite the fact that a 5%fixed stop loss had been set. This can be explained by the presence of the opening gap: since the equity market subject to daily interruptions, it may happen that the price opens directly below (or above for the short trade) the Stop Loss level, generating a wider loss than expected.
It is perfectly normal behavior and represents one of the structural limits of the stock market which, unlike future, remains open only for a time window restricted during the day. However, there are interesting news on this front: there is an extension of the bargaining time for American share markets. If this reform is implemented, it could translate into a reduction in the risk linked to the gaps.
Figure 5. Total trade analysis of the raw strategy with Keltner Channel applied to Tesla actions.
Test with modified conditions related to the Keltner Channel
After observing the initial results, we decided to make a change to the exit logic, leaving the entrance signals unchanged. The goal is to better manage the position even in the absence of strong management movements, introducing a more “neutral” output point.
Specifically, we added an early exit condition on the Keltner Channel mobile average.
The strategy, therefore, works in this way: when the price closes above the upper band, a long position opens to the next bar. This position will then be closed as soon as the price crosses down the mobile average.
On the contrary, if the price closes below the lower band, a short position opens to the next bar. Also in this case the position will be closed if the price crosses up the mobile average.
In both cases, a 5%fixed stop loss remains active, which has the task of protecting the strategy from abnormal movements.
Backtest results after the changes: improved strategy performance
After introducing the output on the central mobile media, the strategy shows a clear improvement in terms of regularity of L’Aquity Line.
In Figure 6 we can observe the overall equity, which has orderly and continuous growth, with minimal phases of laterality. The total net profit rises to about 85,000 dollars, increasing compared to the previous version.
Figure 6. Total equity line of the modified strategy with Keltner Channel applied to Tesla actions.
The most relevant change concerns the composition of the result between the long and short side.
In Figure 7 it is noted that the Long part continues to have a very stable trend, with a growing and balanced curve over time.
But it is above all in figure 8, relating to the short, that you can see the real improvement: equity line is now more constant and less chaotic than the previous version, with a growing and visually more regular curve. The strategy therefore manages to capture bearish movements in a more effective way.
Figure 7. Equity Line only Long of the modified strategy with Keltner Channel applied to Tesla actions.
Figure 8
Analyzing the Total Trade Analysis in Figure 9, however, some compromises emerge. The average profit for trade (Averal Trade) drops to $ 45.55, compared to the 53.22 of the previous version. In percentage terms on the capital of 10,000 dollars, there is talk of about $ 0.45% for trade, a slightly lower value but much more balanced between long and short.
Another important aspect concerns the number of operations: it goes from 1305 to 1876 total trade. This increase in the number of signals offers a remarkable advantage in the development phase: you have a wider sample available, which makes it possible to apply any filters to further improve the quality of the signals, without falling into the risk of overfitting.
Figure 9. Total trade analysis of the modified strategy with Keltner Channel applied to Tesla actions.
Final considerations on the use of the Keltner Channel on Tesla actions
The strategy analyzed represents an excellent starting point for those who want to use the Keltner Channel on a dynamic title like Tesla (TSLA). Despite the simplicity of the approach, the results are solid and show good regularity, especially after the introduction of the exit on the mobile.
Of course, there is still room to improve, especially on the short side which, despite having gained in stability, remains less performing than the long. An interesting direction could be to introduce operating filters, for example by working only in a few days of the week or in certain time slots.
A particularly interesting aspect is that, despite the performance of the Tesla share title in recent years has not been brilliant as in the past, the strategy has continued to generate new equity maximums, demonstrating a certain robustness and adaptability over time.
In summary, it is an already promising base which, with few more precautions, could become a solid component of a systematic portfolio.
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Until next time,
Andrea Unger