A stop loss of 10% would mean your strategy will exit the trade as soon as the price drops more than 10% below the entry point in case the trade ends up in the wrong direction. Several statistical studies and research papers have been produced in recent years to better understand the efficiency of each of these indicators in various market settings. By combining the outcomes of the studies, it can be stated that both indicators have their own merits. An optimum indicator choice may vary based on your trading purpose and market conditions. The Bollinger Bands would be used in some trading circumstances, while the Keltner Channels would be used in others. When the bands are close together, this indicates a period of little volatility.
The concept of squeeze can be applied to both Bollinger Bands and Keltner Channel individually. Typically, the Keltner Channels tend to be tighter than Bollinger Bands. On the other hand, the Bollinger Bands tend to represent market volatility better since the expansion and contraction movements are much wider and explicit as compared to Keltner Channel. We’ll be using the default look-back period of 20 for both the indicators and a multiplication factor of 2 for the upper and lower lines.
When the price is above the upper line, it indicates an uptrend; when it is below the lower line, it shows a downtrend. However, the Keltner Channel tends to be more conservative and less prone to false signals, requiring a stronger price movement to break out of the channel. Bollinger Bands tend to be more aggressive and sensitive to price fluctuations, expanding and contracting with volatility.
Second, Keltner Channels also use an exponential moving average, which is more sensitive than the simple moving average used in Bollinger Bands. The chart below shows Keltner Channels (blue), health care stocks Bollinger Bands (pink), Average True Range (10), Standard Deviation (10) and Standard Deviation (20) for comparison. Notice how the Keltner Channels are smoother than the Bollinger Bands.
Keltner Channel vs. Bollinger Bands Indicator
The word “Keltner Channel” alludes to the structure shaped by the three lines shown above, which builds up when plotted on an asset’s price chart. The three lines go up and down the y-axis, displaying the security price. This movement is like a river, with the upper and lower lines taking after the river bank. 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.
The ATR shows more fluctuations over the short-term, whereas the Bollinger Band® width seems to be smoother at first glance. Furthermore, let us see a few instances where the Bollinger Bands show a better indicator than the Keltner Channels and vice versa.
Indicators based on channels, bands and envelopes are designed to encompass most price action. Therefore, moves above or below the channel lines warrant attention because they are relatively rare. A surge above td sequential indicator the upper channel line shows extraordinary strength, while a plunge below the lower channel line shows extraordinary weakness. Such strong moves can signal the end of one trend and the beginning of another.
On the other hand, if a trader is more interested in a straightforward volatility-based approach, the Keltner Channel could be a better fit. The squeeze happens when the market is experiencing low volatility. According to John Bollinger, periods of high volatility follow low volatility. Hence, we prepare for Bollinger bands to give us a signal when the volatility is about to shoot up. The extreme channels of the Bollinger Bands rise more quickly due to their specific method of calculation. The price has to be quite strong to maintain a closing price above the upper Bollinger band.
- A flat trend requires a more nimble approach because prices often peak at the upper channel line and trough at the lower channel line.
- This will ensure that momentum is on the side of the trade and the advance will continue.
- The Keltner Channel, developed by Chester W. Keltner, is a volatility-based indicator.
So the number of signals is greater with the Bollinger Bands, but the flip side of the coin is that at the same time, the number of false signals increases. The difference between the two methods of calculation becomes especially apparent in the case of sudden very significant price changes. Because Keltner Channels use an average instead of the classical standard deviation, the indicator will react less directly to sudden strong price changes. As a result, the movement of the indicator looks a bit smoother, with fewer outliers.
DataFrame Methods
When the upper and lower bands of the Bollinger bands are close enough, options traders employing volatility measurement as a critical trading signal are more likely to buy options. Options traders use this method to profit when price volatility returns to average levels. 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. One potential pitfall of using Bollinger Bands is that they can provide false signals in a ranging market. The way the center line is calculated for both indicators is also different.
Here are the previous Styles implemented using a Strategy Class:
Commonly used complementary indicators include the average directional index (ADX) and the relative strength index (RSI). Members can also set up alerts to notify them when a Keltner Channel-based signal is triggered for a stock. Alerts use the same syntax as scans, so the sample scans below can be used as a starting point for setting up alerts as well. Simply copy the scan text and paste it into the Alert Criteria box in the Technical Alert Workbench.
time_range
Because Bollinger Bands measure volatility, the bands adjust automatically to changing market conditions. The upper and lower bands measure volatility, or the degree in the variation of prices over time. The squeeze refers to a period of low volatility identified by the narrowing of the Bollinger Bands or Keltner Channels. It indicates a potential upcoming price breakout or significant move in the market as volatility returns. Combining strategies is always the right path towards a robust system.
The main difference between the two interpretations is that STARC bands help to determine the higher probability trade rather than standard deviations containing the price action. Simply put, the bands will allow the trader to consider higher or lower risk opportunities rather than a return to a median. As I said, a significant difference value investing strategy is that Bollinger Bands respond more quickly to changes in market conditions than Keltner Channels. For example, suppose prices drop suddenly during a period of low volatility. In that case, Bollinger Bands will tighten more quickly than Keltner Channels since they rely on standard deviations rather than averages for their calculations.
On the other hand, the expansion of the bands may show a rise in market volatility. 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. A few traders may buy the stock when it reaches the lower Bollinger Band and sells when it reaches the middle Bollinger Band’s moving average.