Keltner Channels were first introduced by Chester Keltner in his 1960 book, How to Make Money in Commodities, and subsequently updated by Linda Raschke. Similar to Bollinger Bands, they consist of a pair of volatility-based envelopes positioned above and below a middle moving average. FOREX.com, registered with the Commodity Futures Trading Commission (CFTC), lets you trade a wide range of forex markets plus spot metals with low pricing and fast, quality execution on every trade. Now, before we move into the ideal usage scenarios for both each of these indicators, let us first understand what both these indicators are and how these are calculated. Tradeveda.com is owned and operated by NERD CURIOSITY MEDIA PRIVATE LIMITED. TradeVeda.com and its authors/contributors are not liable for any damages and/or losses caused due to trading/investment decisions made based on the information shared on this website.
- If you are an active trader or a scalper looking to profit from every trading opportunity that the market presents, Bollinger Bands would better suite your trading personality.
- When the channel narrows, it indicates low volatility; when it expands, it means high volatility.
- Additionally, when price breaks through one of the bounds, it may signal a potential reversal or a continuation of the current trend, depending on price action and other technical factors.
- Overbought conditions occur when excessive buying pressure drives the price of a security to a level that suggests an imminent decline.
- Keltner Channels can be used to find reversals, but it’s often much harder than with Bollinger Bands.
- In this article, we’ll dive into the differences between the two, explain their components, and discuss which one is best.
When the bands have only a minor slope and track almost parallel for an extended period, the price may bounce between as if in a channel. Despite its cool name, the Supertrend indicator often seems to slip under the radar. Here I explain how it’s calculated, and combine it with moving averages to produce a simple trend following strategy.
Widely known for their ability to incorporate volatility and capture price action, Bollinger Bands® have long been a favorite of Forex traders. However, there are other technical options that traders in the currency markets can apply to capture profitable opportunities in swing action. A trader who knows how to utilize channels the right way can add a great tool to find more confluence factors for his/her price analysis. In this article I will talk about the Keltner Channel and the Bollinger Bands® – and which one you should use. Once a squeeze has occurred, a price breakout from the upper Bollinger Band would indicate the possibility of an uptrend in the future.
The middle of these three lines is an exponential moving average (EMA), usually set to 20 periods. The upper and lower lines are multiples of the Average True Range (ATR) added or subtracted from the EMA, often double. The ATR measures the volatility of an asset by taking the average of the true ranges of its price movements over a certain period. Another great channel study that is used in multiple markets by all types of traders is the Keltner channel. The application was introduced by Chester W. Keltner (in his 1960 book How To Make Money In Commodities) and later modified by famed futures trader Linda B. Raschke.
Trading Strategies
Therefore, a Donchian Channel will expand when the security market becomes more volatile and contract in the opposite case. Likewise, the upper and lower Bollinger Bands will either expand outward from the middle band or contract closer based on whether volatility is increasing or decreasing, respectively. Many traders have developed systems that thrive on these bounces and this strategy is best used when the market is ranging and there is no clear trend. One basic but successful trading strategy is to buy when the security’s price touches the lower Bollinger Band and sell when it touches the upper Keltner Channel. Bollinger Bands are best used for short-term trading, as they respond quickly to price changes. Keltner Channels are better for longer-term trading as they are less affected by short-term volatility.
The Bollinger Bands strategy seems to perform best with a lookback period of about 30, and a volatility multiple of at least 2.25. The Keltner Channels perfer a 40-bar lookback and a volatility mutiple of about 2.25. Of course, if you trade a different timeframe or market, these optimal parameters could well be different. We will use a simple risk-adjusted return metric, the return/maximum drawdown (Ret/DD) ratio.
- These specific scenarios will be identified later in this article, based on the findings of some research papers that are publicly available.
- So instead of making it a case of which is better (Keltner Channels vs Bollinger Bands), we think using both together as a trading strategy might serve you well as a trader in the long run.
- When price ranges, Keltner Channels often show a new trend forming much faster than Bollinger Bands, thanks to the telltale sloping of the channel.
Raschke altered the application to take into account the average true range (ATR) calculation over 10 periods. The ATR measures volatility or how extensive the price moves are for a commodity or currency over a set period. The Keltner Channel is a volatility-based technical indicator composed of three separate lines. The upper band is typically set two times the ATR above the EMA, and the lower band is typically set at the inverse of two times the ATR (below the EMA).
Both Bollinger Bands and Keltner Channels Should Not Be Used in Isolation
As you can see, the price settled back down towards the middle area of the bands. After a squeeze, if price aggressively pierces either of the upper or lower bands, it is likely to follow through in that direction, and that could be our signal to jump on the bandwagon. Another strategy is to watch for bullish/bearish divergences between the security’s price and the Keltner Channel’s moving average.
Related Video on Bollinger Bands
In a high-volatility market, a trader may miss multiple trading signals if the trader uses the Keltner channel. According to much research, Bollinger Bands may be frequently utilized roboforex review by investors trying to sell options. Options traders search for occasions when the Bollinger Bands Indicator’s upper and lower bands are much apart for a short period.
Which Forex Markets Are the Best for Trend Following?
The moving average used in Bollinger Bands provides further support in determining the trade entry and exit points. The Donchian Channels record the highest highs and the lowest lows of a price over a given period. But Bollinger bands plot the difference of two standard deviations (under default indicator setting) from the simple moving average of the price data for the period. This means Bollinger Bands make provisions to account for outliers and prevent them from skewing the data analysis.
When price volatility suddenly decreases, the extreme bands of the Bollinger Bands will converge faster. In this way, a narrow trend channel emerges more quickly than with the Keltner Channels. Keltner Channels similarly measure this volatility but do so in a somewhat more nuanced way.
For that reason, a number of previously conducted studies have found the Bollinger Bands to be the indicator of preference in making trading decisions based on short-term price fluctuations. Overbought conditions occur when excessive buying pressure drives the price of a security to a level that suggests an imminent decline. The Bollinger unreal engine 4 for unity developers Bands Indicator identifies overbought conditions when prices approach or exceed the upper band of the indicator. Both indicators, Donchian Channels and Bollinger Bands, measure the volatility of the security market that is being analyzed. A trading security is considered volatile when it records rapid fluctuations in price.
Now, let us further expand on these three areas of differences between these two indicators. With both indicators, an expansion would indicate an increase in volatility and a contraction would suggest the opposite, a decrease in volatility. Bollinger Bands are dynamic, react faster, and are agile to use for xtb.com reviews high volatility assets. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. Think of the channel like an ascending or descending channel, except it automatically adjust to recent volatility and isn’t made up of straight lines.
A contraction in the range indicates low volatility, while an expansion suggests increasing volatility. Consequently, many traders prefer utilizing Bollinger Bands to assess market volatility. The Bollinger Bands represent a widely utilized technical indicator that assists in identifying an asset’s volatility and potential price movements. Developed by John Bollinger in the 1980s, it has gained significant popularity among traders of all experience levels. In the case of Bollinger Bands, a breakout outside the upper or the lower band indicates a potential reversal in trend.
It is almost never a good idea to make trading decisions purely based on the signals from any one indicator. Similarly, options traders using volatility measurement as the primary trading signal tend to buy options when the upper and lower bands of the Bollinger bands are close together. Under this strategy, options traders hope to book some profit when the volatility in price gets back to average values.