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Introduction to Bollinger Bands & Keltner Channels by MS_Bybit Bybit Ambassadors

bollinger bands vs keltner channels

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. Instead, it is sometimes wise to measure the width of the «no man’s land» area (distance between +1 and –1 SD) and add it to the upper band. By using the volatility of the market to help set a stop-loss level, the trader avoids getting stopped out and is able to remain in the short trade once the price starts declining.

Consequently, they are more useful for investors with longer investment horizons who have no problem waiting a little longer in exchange for a slightly greater reliability of the buy or sell signal. A bullish reversal signal is also possible and occurs when an existing strong bearish trend is coming to an end. Remember that your results will be astronomically improved when you confluence any of the indicators with other technical tools or indicators. In the above chart, we’re presenting long trade examples and how one would have benefited from using the Keltner Channel and Bollinger Bands Strategy.

bollinger bands vs keltner channels

Here I explain why you should do it, and how to conveniently do it in MT4 and StrategyQuant. The ability to efficiently trade a diversified portfolio of strategies is one of the biggest advantages of algorithmic trading. Here we will use QuantAnalyzer’s Portfolio Master to build a portfolio consisting of high performing, uncorrelated strategies. Perhaps the professional hedge funds can help define good trading performance.

Using Bollinger Bands to Gauge Trends

Incorporating various complementary indicators in your trading strategy will give you a broader perspective on the market psychology, and consequently result in better trading outcomes. In Figure 5, we see a very profitable opportunity in the British pound/U.S. This is not to say that the price action won’t go against the newly initiated position. However, STARC bands do act in the trader’s favor by displaying the best opportunities.

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. We can see that, prior to December 8, the price action is contained in tight consolidation within the parameters of the bands.

Bollinger Bands is a technical analysis tool used by forex traders to help identify potential price movements in the currency market. Developed by John Bollinger, this indicator consists of three lines – a simple moving average (SMA) in the middle and an upper and lower band that are two standard deviations away from the SMA. The bands are designed to show the range within which the currency pair is likely to trade, based on its recent volatility.

  • The faster Bollinger Bands® can potentially react faster to a changing market and, thus, provide signals earlier.
  • This is backed by the fact that once the price starts breaking out of the bands, it would mean a relaxation of the squeeze and the possibility of high market volatility and price movement in the future.
  • If you are day trading with the Keltner Channel, having the ability to quickly notice when a trend can be changing is huge.

Some may prefer to trade reversals with Bollinger Bands or jump on board breakouts with Keltner Channels. You could play around with both in the free TickTrader platform from us at FXOpen to get an idea of how to apply both indicators while trading. To identify a trend using Keltner Channels, we can examine whether it slopes up or down.

Ride Breakouts With This Support & Resistance Indicator!

Here I’ll program a trading pause into a simple breakout strategy, and test its effectiveness on the Widow Maker – the GBPJPY. For each strategy, the top parameter set was applied and backtests were done on the three markets (GBPJPY, AUDJPY, EURAUD). A correlation matrix was then constructed, showing the correlation of weekly profit over the backtest period. At least they tend to generate slightly more trades than the Bollinger Bands, improving the reliability of your backtest. Sometimes I consider adding a weaker strategy to my portfolio if it adds diversification.

Finally, you can also experiment with increasing the distance of the channels from the middle line. All charting software allows you to set your own parameters, and some traders prefer to use three times ATR on the Keltner channels. As demonstrated in the video, increasing the width of the channels this much allows most of the price action to be constrained within the boundaries. Inevitably, this is a trade-off, because by having a wider channel you will have fewer touches of the outer bands and therefore less signals to trade. As with all trading analysis techniques, you should experiment and find out what works best for you. There are multiple uses for Bollinger Bands®, including using them for overbought and oversold trade signals.

Price Channels versus Bollinger Bands

The lower band is calculated by taking the middle band minus two times the daily standard deviation. During periods of high volatility, the bands widen, and during low volatility, the bands contract. When the price moves close to the upper or lower bands, it indicates that the market might be overbought or oversold, respectively. The theory behind the signals may seem a little confusing at first, as most traders assume that a break of the upper or lower boundary signals a reversal, but it is actually quite simple.

bollinger bands vs keltner channels

From the tests above, Bollinger Bands have emerged as the clear winner. Compared to the Keltner Channels, they exhibit better profitability with ai companies to invest in lower market exposure. If you use a different strategy logic, or use the indicators in a countertrend manner, your test results may well vary.

FIWC Beginner Day #6 – Bollinger Band Trading

Well, there’s a slight difference in how they look on the chart and even more in how they are used. Are you getting a comprehensive assessment of your strategy’s downside? This post will discuss several methods to measure drawdowns, helping you build and select strategies that better suit your risk appetite. With a fresh algorithm at your fingertips, how do you verify that it has been programmed correctly? This guide will show you how to use Metatrader 4’s visual backtester to debug and backtest your strategy.

I have talked about the issue of surface-level technical analysis in a previous podcast (Do indicators work?). As briefly mentioned, the Keltner Channel uses the ATR as its core to define the width of the channel, whereas the Bollinger Bands® use the standard deviation. In the screenshot below, I plotted both indicators – I used Bollinger Band® width – below the price chart. Volatility Channels are a type of indicator that plot volatility-related lines above and below the market. They widen as volatility increases, and narrow as volatility decreases.

The Keltner channel uses the average-true range (ATR) or volatility, with breaks above or below the top and bottom barriers signaling a continuation. What sets these two apart are the underlying indicators and calculations, Let’s just say that these formulas yield differences in price sensitivity and the smoothness of the indicators. 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 technical indicator is not better than the other; it is a personal choice based on which works best for the strategies being employed. Note how, in the following chart, the trader is able to stay with the move for most of the uptrend, exiting only when price starts to consolidate at the top of the new range.

A price will regularly breach or close outside of the channel in a strong trend while not crossing Bollinger Bands. It’s best to apply Keltner Channels to trend trading and identifying breakouts. If a trader prefers a more dynamic indicator that adapts to changing market volatility, Bollinger Bands might be the preferred choice.

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. Therefore, the technical indicator that you choose to incorporate in your trading strategy will depend largely on the specific insights that you are looking to extract. Hence, based on your requirements, you will find scenarios in which Bollinger Bands are preferable to Keltner Channels and vice versa. A bullish squeeze setup occurs as soon as the price breaks out and closes above the upper Bollinger band. This is an indication that volatility is increasing and there is a chance of a strong upward movement with high momentum.