Keltner Channels and Bollinger Bands are both very popular forex trading indicators, but are Keltner Channels and Bollinger Bands equally effective in identifying market opportunities? These two technical indicators, commonly employed in technical analysis, aim to gauge price volatility of an asset. However, it begs the question: is one indicator superior to the other in terms of effectiveness? Let’s find out.
Comparing Keltner Channels and Bollinger Bands
The Bollinger Bands Indicator holds greater popularity and enjoys a higher adoption rate compared to the Keltner Channels Indicator. This preference stems from the Bollinger Bands’ heightened sensitivity to market volatility, enabling them to generate more precise trading signals.
Consequently, if your aim is to maximize trading opportunities using these indicators, the Bollinger Bands Indicator would be better suited for your needs. However, it is important to note that there are specific trading scenarios where the application of Keltner Channels would be more appropriate. These particular scenarios will be outlined later in this article.
Now, before delving into the ideal usage scenarios for each of these indicators, let us first grasp their definitions and the calculation methods employed.
Keltner Channel Explained
The Keltner Channel serves as an indicator that aids traders in assessing trends, momentum, and potential reversal areas within a given market. It derives its name from Chester Keltner, who introduced it during the 1960s. Comprised of three lines, the Keltner Channels form an envelope.
Among the three lines, the middle line represents an exponential moving average (EMA) typically set to 20 periods. The upper and lower lines are multiples of the Average True Range (ATR), added or subtracted from the EMA, often multiplied by two. The ATR calculates the volatility of an asset by determining the average of the true ranges of its price movements over a specific period.
Interpreting the Keltner Channels can be done in various ways. The upper and lower bounds serve as dynamic support and resistance levels, assisting traders in identifying entry and exit points. Furthermore, when the price breaches either of these boundaries, it may indicate a potential reversal or the continuation of the prevailing trend, depending on price action and other technical factors.
For example, during a robust bullish trend, the market tends to closely align with the upper line, frequently retracing towards the EMA before resuming its upward movement. Conversely, when the closing price significantly deviates beyond the channel’s lines, it may indicate a potential reversal, suggesting that the price has surpassed its anticipated true range. Following a period of consolidation, observed when the lines exhibit a horizontal orientation, such substantial price movements may signal a breakout.
Bollinger Bands Explained
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.
Similar to the Keltner Channels, the Bollinger Bands consist of three primary components: a middle line and two outer lines. The middle line corresponds to a simple moving average (SMA) typically calculated over a 20-period timeframe. The upper and lower bands are determined by adding and subtracting a multiple of the asset’s Standard Deviation from the SMA. By default, this multiple is set to two, although some traders may adjust it based on personal preferences.
In contrast to the Keltner Channels’ usage of true range, the Bollinger Bands rely on Standard Deviation (STD), which represents the square root of the variance in price movements over a given period. Due to their implementation of Standard Deviation, the Bollinger Bands tend to be slightly more responsive to changes in volatility compared to the Keltner Channels. 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.
Like the Keltner Channels, the bands also serve as dynamic support and resistance levels. They are effective in detecting reversals, as will be explained shortly. Additionally, Bollinger Bands can be applied to identify trends or breakouts when the price consistently hugs the boundaries, although some argue that Keltner Channels excel in this regard.
Keltner Channel vs Bollinger Bands: Differences
It is well-known that technical analysis does not offer a single indicator that can be universally applied to all trading scenarios or objectives. Therefore, the choice of technical signals within your trading strategy will primarily depend on the specific insights you seek. Depending on your requirements, you may find either Bollinger Bands or Keltner Channels more suitable.
On a broader level, Keltner Channels and Bollinger Bands exhibit significant differences:
- Keltner Channels utilize the average true range (ATR) to determine the outer lines, whereas Bollinger Bands employ the Standard Deviation of price changes.
- The middle line of the Keltner Channel is based on an exponential moving average (EMA), while the middle line of the Bollinger Bands relies on a simple moving average (SMA).
- Bollinger Bands excel in identifying reversal trading opportunities, especially when the price fails to reach the outer bands following a trending period and subsequently reverses towards the opposite side of the bands.
- When the price can reach the outer bands, both the Keltner Channel and Bollinger Bands indicate a strong trending market. This confirmation signifies a more prolonged price movement compared to previous instances.
- Similar to Bollinger Bands, Keltner Channels generate signals when price action breaks above or below the channel boundaries. However, in this case, when the price surpasses the upper or lower bounds, a continuation of the trend is favored over a retracement towards the middle or opposite boundary.
One crucial distinction is that Bollinger Bands demonstrate more rapid responsiveness to market condition changes compared to Keltner Channels. For instance, if prices experience a sudden decline during a low volatility period, Bollinger Bands will contract faster due to their reliance on Standard Deviations rather than averages for calculations.
Additionally, in situations where markets tend to form channel-like patterns, with prices oscillating within relatively narrow ranges for extended durations, Bollinger Bands will exhibit relatively stable channels over time, while Keltner Channels will likely undergo significant shifts between periods due to varying volatility levels.
ATR vs Standard Deviation
The Keltner Channel derives its width from the Average True Range (ATR), while the Bollinger Bands employ the Standard Deviation for calculating channel width. The primary distinction between these two indicators lies in their sensitivity to market conditions. The ATR tends to exhibit more fluctuations over a short-term period and indicates changes in market conditions less frequently compared to the Standard Deviation. However, both indicators can be employed for various purposes, depending on your objectives.
Traders often utilize the ATR to identify support and resistance areas or determine market volatility. Many trading strategies are built around technical indicators that measure these characteristics. On the other hand, the Bollinger Band width serves not only as a valuable tool for assessing market volatility and support/resistance, but also excels in identifying potential breakouts and reversals. Combining both indicators can also be beneficial, such as by examining different time frames like 15-minute charts and daily charts, or applying them selectively to specific securities.
Ultimately, the choice between these indicators hinges on the specific goals of your trading strategy and whether you seek additional guidance in making trading decisions.
Keltner Channels Offer More Reliable Trading Signals For Long-Term Trading In High Volatility Markets
Unlike Bollinger Bands, which base their outer bands on standard deviation, Keltner Channels are calculated using the average true range. This distinction makes Keltner Channels less volatile, reducing the likelihood of false trading signals in high volatility market conditions.
Numerous studies have empirically tested this theory and consistently found that Keltner Channels exhibit fewer fluctuations than Bollinger Bands in high volatility market environments. Consequently, as mentioned earlier, Bollinger Bands have a higher potential for generating false signals compared to Keltner Channels.
Due to these findings, many traders, particularly in the energy markets known for their inherent volatility, prefer utilizing Keltner Channels over Bollinger Bands. The enhanced reliability of Keltner Channels makes them a preferred choice for long-term trading strategies in such market conditions.
Bollinger Bands Indiactor Is More Suitable For Identifying Overbought And Oversold Conditions
In 2010, a group of researchers from Manonmaniam Sundaranar University conducted a study to assess the effectiveness of various data mining techniques in predicting the future performance of the stock market. The study revealed that Bollinger Bands were highly effective in identifying overbought and oversold conditions in the stock market and forex.
Based on this statistical evidence, it is advisable to choose the Bollinger Bands Indicator over the Keltner Channels Indicator when your objective is to identify overbought and oversold conditions in the market.
Overbought conditions occur when excessive buying pressure drives the price of a security to a level that suggests an imminent decline. The Bollinger Bands Indicator identifies overbought conditions when prices approach or exceed the upper band of the indicator.
Conversely, oversold conditions occur when excessive selling pressure drives the price of a security to an abnormally low level, indicating a potential rebound to a higher level. The Bollinger Bands Indicator identifies oversold conditions when prices approach and fall below the lower band of the indicator.
By now, you should have gained a comprehensive understanding of the distinctions between Keltner Channels and Bollinger Bands. Although they may appear similar at first glance, engaging in practical experimentation will unveil the unique attributes of each indicator and their respective applications across diverse scenarios.