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Keltner Channels vs. Bollinger Bands® – Which One is More Effective?

Sebencapital

Published
11/10/23
Keltner Channels vs. Bollinger Bands® – Which One is More Effective?

Trading channels are widely used indicators, and for good reason. A trader who understands how to employ channels effectively can enhance their toolkit for identifying additional price-analysis confirmation factors. In this article, we'll discuss the Keltner Channel and the Bollinger Bands® and help you decide which is best for your needs.

Bollinger Bands®

We've discussed Bollinger Bands® extensively on this blog before. So, let's quickly recap what Bollinger Bands® do.

The outer bands are calculated based on the standard deviation of price fluctuations. As the candlesticks grow longer, the outer bands widen, moving farther apart.

Bollinger Bands® are most regularly used as a trend-following indicator. When the price closely hugs the outer bands, it indicates a strong trending market.

Additionally, Bollinger Bands® can serve as a tool to identify reversal trading opportunities, particularly when the price fails to touch the outer bands after a trending period and then reverses direction towards the opposite side of the bands.

For a comprehensive guide on trading with Bollinger Bands®, refer to my detailed article here: Bollinger Bands® Trading 101.

BOLLINGER BANDS®

Keltner Channel

While many traders may think there's no distinction between the Bollinger Bands® and Keltner Channel, there are differences worth knowing. Although they may appear similar, understanding these distinctions is crucial. Here's what the Keltner Channel brings to the table:

The Keltner Channel relies on the Average True Range (ATR) indicator. As a result, it projects the true width of the price range.

If you want to learn more about the ATR indicator, I've written an ATR Indicator Guide.

Like the Bollinger Bands, the Keltner Channel signifies a robust trending market when the price touches the outer bands. This signal confirms that the current price movement surpasses the length of previous price fluctuations.

Conversely, when the price fails to reach the outer Keltner band, it indicates that price movements are becoming shorter.

Understanding these differences can be valuable in your trading strategy.

KELTNER CHANNEL

The Difference Between The Std Dev And Atr

As mentioned briefly, the Keltner Channel utilizes the Average True Range (ATR) as its core component to define the channel's width, whereas the Bollinger Bands® rely on standard deviation. In the screenshot below, I have plotted both indicators using the Bollinger Band® width, just below the price chart.

One noticeable difference is that the ATR displays more short-term fluctuations, whereas the Bollinger Band® width appears smoother at first glance.

Upon closer examination, the ATR generally provides a smoother directional output. In contrast, the Bollinger Band® width frequently changes direction, indicating shifts in market conditions. The ATR indicator tends to change direction less frequently.

So, what does this mean for traders?

Recognizing that there's no definitive "better" or "worse" choice between faster and slower-reacting indicators is essential. Each approach comes with its own set of advantages and disadvantages.

The faster Bollinger Bands® can potentially respond more quickly to changes in the market, offering earlier signals. However, they are also more prone to generating false signals due to short-lived price fluctuations. The choice between indicators largely depends on the trader's preferences and style.

THE DIFFERENCE BETWEEN THE ATR AND STD DEV

The Channel-cross

Another intriguing signal worth delving into is the Channel Cross.

The following screenshot shows that the Bollinger Bands® surpasses the Keltner Channel during robust trending market phases. In contrast, the Keltner Channel crosses above the Bollinger Bands when the trend begins to lose steam.

This phenomenon is logical because the Bollinger Bands® widen more rapidly (due to the standard deviation calculations) during periods characterized by long candlesticks.

THE CHANNEL-CROSS

This phenomenon underscores the importance of understanding the underlying calculations and formulas that drive your indicators. I discussed the limitations of surface-level technical analysis in a previous podcast ("Do indicators work?").

The Channel-Cross strategy excels when market volatility is low, meaning the trend experiences minimal back-and-forth fluctuations. However, as volatility increases, the accuracy of the Channel-Cross diminishes because both channels start to intersect frequently.

In conclusion, neither indicator holds a clear superiority over the other. I lean towards using the Bollinger Bands® due to the statistical aspect of standard deviation. Without delving too deeply into statistics, it's worth noting that standard deviation is employed to calculate confidence intervals.

When Bollinger Bands® are set at two standard deviations, it implies that only 5% of all price action should fall outside the bands. A breach signals a statistically significant event. Although the ATR and the Keltner Channel exhibit

Written by Sauravsingh

Techpreneur and adept trader, Sauravsingh Tomar seamlessly blends the worlds of technology and finance. With rich experience in Forex and Stock markets, he's not only a trading maven but also a pioneer in innovative digital solutions. Beyond charts and code, Sauravsingh is a passionate mentor, guiding many towards financial and technological success. In his downtime, he's often found exploring new places or immersed in a compelling read.

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