The Rubber Band trading strategy aims to identify points where the market is overbought or oversold and likely to snap back towards the mean. Some traders use Keltner Channels for this strategy, while others use Bollinger Bands.
We’ll take a look at how this strategy is used with Kelter Channels. The strategy uses a 40 period Keltner Channel with a 4.0 standard deviation for the outer band.
When price trades above or below the 4.0 standard deviation Keltner Channel, this opens the door for a potential reversal set up. This is point A illustrated on the Dax chart above.
The strategy also uses a 40 period keltner channel, but this time with a 2.0 standard deviation. When price has reversed to this level, the entry is triggered. This is illustrated by point B on the chart above. The profit target is the 40 period keltner channel (the center band in yellow, marked with C). The protective stop loss is placed at the 4.0 standard deviation band whether you enter long or short.