Bollinger Band and Keltner Channel Trading Strategy by Kshitiz Khandelwal Mudrex

When the price of an asset rises above the upper band, it is termed overbought, and when it falls below the lower band, it is deemed oversold. Bollinger Band is one of the fascinating technical indicators utilized by practically all traders since it can gauge an ongoing trend, detect oversold levels, and indicate trend reversals. 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.

This indicator uses the Average True Range for this purpose which in itself is also an average of the absolute price range. The difference between the two indicators is reflected in the way volatility is calculated, both for the outer channels and for the centerline. The line above it is called the upper Bollinger Band and the one beneath the lower Bollinger Band. Both lines are calculated using a standard deviation based on the middle line. That standard deviation creates a dynamic field around the price and is used to represent the variation. For many beginner traders, embarking on the journey of financial markets presents a unique set of challenges.

• 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.
• Bollinger Bands, relying on standard deviation, provide insights into market volatility and potential overbought or oversold conditions.
• The Donchian Channels record the highest highs and the lowest lows of a price over a given period.
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Both Keltner Channels and Bollinger Bands can be used together for better results instead of having to choose one over the other. We recommend that you seek independent financial advice and ensure you fully understand the risks involved westernfx before trading. At this point, I’m assuming you are wondering which indicator is better and in the true form of a trader, I will say both. Each of these price-lagging indicators do a great job for what they are designed to do.

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The price has to be quite strong to maintain a closing price above the upper Bollinger band. Bollinger Bands are more sensitive to market volatility as explained above. Before we get into the best-used instances for each indicator, it would be essential to understand what the indicators do and how they are determined. Research on the usage of Bollinger Bands in the Baltic Stock Market released by Kaunas University of Technology in 2010 made a similar recommendation based on a series of statistical tests. Several complementing indications can help you get a better picture of the market condition and assist you time your buying and selling decisions. This post will discuss several methods to measure drawdowns, helping you build and select strategies that better suit your risk appetite.

Also used in the futures and options markets, these technical indicators have a lot to offer given the vast liquidity and technical nature of the FX forum. The Bollinger Bands and Keltner Channels notify you when a market is transitioning from a lower volatility to a higher volatility. Using these two indicators together will provide more strength, fp markets review compared with using a single indicator. While every strategy has its drawbacks, volatility channels have become one of the most useful and commonly used tools in spotlighting extreme short-term prices in a security. The bottom line is that they are designed to discover opportunities that give investors a higher probability of success.

• Also used in the futures and options markets, these technical indicators have a lot to offer given the vast liquidity and technical nature of the FX forum.
• The Bollinger Bands would be used in some trading circumstances, while the Keltner Channels would be used in others.
• When an asset is trending higher, the price should regularly reach or approach the upper band and occasionally move past the upper band.
• Depending on your requirements, you may find Bollinger Bands preferable to Keltner Channels and vice versa.

Both indicators can be used to read market volatility by looking at the width of the channel. When the channel narrows, it indicates low volatility; when it expands, it means high volatility. However, the Keltner Channel tends to have a smoother and slower change in volatility, as it is based on the ATR, which is an average measure. Bollinger Bands tends to have a sharper and faster change in volatility, as they are based on the standard deviation, which is a relative measure.

Although the two indicators have many similarities, they each respond to price changes in their own way because they are calculated differently. A bullish reversal signal is also possible and occurs when an existing strong bearish trend is coming to an end. Keep Trading It is where you can find in-depth trading guides, analysis and more on a wide range of financial topics from Stocks, Options and Cryptocurrencies. A virtual private server (VPS) is a virtual computer that you can rent and access remotely. It provides a reliable platform on which to execute your forex strategies. This post will help you decide whether you need a VPS, and show you how to select an optimal VPS.

Bollinger Bands aren’t just for stock traders or options traders; Bollinger Bands may be used to sell or buy options regularly. A few investors may try to buy stocks when the price falls below the lower band and sell when the price rises above the moving average. Others may buy if the price increases over the upper band and sell if it falls below the lower band. The indicators are notably distinct, and establishing a consistent relationship may be difficult. Because of the inherent variances in volatility measurement, both indicators are likely to provide various trading profiles.

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Personally, I prefer the Bollinger Bands® because of the statistical component of the standard deviation. Without getting too much into statistics at this point, the standard deviation is used to calculate confidence intervals. This means that when the Bollinger Bands® are set to 2 standard deviations, only 5% of all price action should be outside of the bands. The ATR and the Keltner Channel is behaving similarly, though, and will often provide similar signals.

In this paper, Lento and Gradojevic studied the effectiveness of delivering profitable trades for various technical indicators and the broader concepts in technical analysis. If you have read any other articles from me, you would know how strongly I stress on not relying 100% on any one technical indicator or technical analysis concept. Irrespective of what indicator or what concept (such as – Support and Resistance, etc.) you choose, you must always complement it with other confirmation signals for optimum results. In overbought conditions, excessive buying of a security has pushed its trading price so high that it is anticipated that the security’s price will see a decline soon.

USD/CAD Daily Price Forecast – 11th October 2023

Hence, how you incorporate the signals from Bollinger Bands will completely be dependent on your overall trading strategy. In essence, the term “Keltner Channel” is used to describe the structure that the 3 lines, described above, form when they are plotted on the what etoro is all about price chart of an asset. These lines move up and down along the y-axis that represents the price of a security. In a way, this movement is similar to what you would see with a river or stream, with the upper line and lower line mimicking the banks of the stream.

By using Bollinger Bands in forex trading, traders can potentially identify trends, reversals, and volatility, and make informed trading decisions. The Keltner Channel is based on the Average True Range, whereas the Bollinger Bands® use the standard deviation to calculate the width of the channel. In general, however, both indicators can be used for different purposes, depending on your goal. For instance, traders often use the ATR to spot support and resistance areas or determine market volatility. On top of that, many trading strategies are based on technical indicators that measure these two characteristics. The Bollinger Band® width can also be used for such purposes but is also an excellent tool for identifying potential breakouts and reversals.

What Is Drawdown in Trading?

A breakout in the price above the upper band of Bollinger Bands suggests that perhaps the market has been overbought and is due to bounce back. Likewise, when the price of the asset breaks below the lower band of the Bollinger Bands, it indicates that prices have fallen too much and are due to bounce back. It depends on the nature of the market one is trading in, the asset and its volatility, the trading strategy, and the risk tolerance of the trader. In cases where the market volatility is high and/or the trader has moderate to high-risk tolerance, Bollinger Bands will prove to be a better trading indicator. Statistically, 95% of price action should be inside Bollinger Bands with two standard deviations. This is significant for identifying potential overbought and oversold areas; moves beyond the bounds indicate that the price action is extreme and has a strong likelihood of reversing.

The bands expand and contract as volatility (measured by ATR) expands and contracts. Bollinger Bands’ outer bands are based on standard deviation rather than accurate average range and may be more volatile than Keltner channels. As a result, Keltner Channels could be less likely to generate a misleading trade signal in a high-volatility market situation for longer-term trading. The Bollinger Bands can be more sensitive to market volatility than others.

Stock prices do not move as fast, so the upper and lower bollinger bands move closer together. Average true range also tends to be less volatile than standard deviation, creating bands which are smoother but contain more lag. By default, both indicators use a 20-bar lookback period and a volatility multiple of 2. Traders use Keltner Channels and Bollinger Bands to analyze short-term trends by looking at the direction and position of the price relative to the channel lines.

Indicator Appearance is the most noticeable commonality between the Donchian Channels and the Bollinger Bands. Both Indicators comprise of three bands – the upper, the lower and the middle band. Hence, to the eyes of a novice trader, both these indicators look exactly the same.

The Keltner Channel is an indicator that helps traders determine trends, momentum, and potential reversal areas in a given market. So, I wanted to know people’s opinions regarding these two indicators because the few stocks I’ve been trading lately seem to be respecting both on the daily charts. I know no indicator is perfect, but it seems that these two work better than regular moving averages to help show market sentiment from a technical point of view. We can get better results using Bollinger bands and the Keltner channel alongside support and resistance to form a strategy. For example, trading the squeeze setup is more reliable when combined with Support and Resistance indicator. Donchian channels are price channel studies that are available on most charting packages and can be profitably applied by both novice and expert traders.