Both Keltner Channels and Bollinger Bands can be used together for better results instead of having to choose one over the other. For fine tuning your entry points, we’re going to use both the Keltner Channel and Bollinger Bands indicator together instead of trying to pair up which is better (Keltner Channels vs Bollinger Bands). Every day I come across a trading guru offering educational content on the internet.
- However some of the same principles apply in using Keltner channels as do for Bollinger bands.
- Personally, I prefer the Bollinger Bands® because of the statistical component of the standard deviation.
- Now, you will find plenty of market conditions where it’s ideal to trade based on the standard deviation of price fluctuations versus the average true range, and vice-versa.
- 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.
Using the bands as overbought/oversold indicators relies on the concept of mean reversion of the price. Mean reversion assumes that, if the price deviates substantially from the mean or average, it eventually reverts back to the mean price. Keltner Channels can be used to find reversals, but it’s often much harder than with Bollinger Bands.
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Since both indicators tend to produce correlated strategies, it is not advisable to simultaneously trade both in your portfolio. We will use a simple risk-adjusted return metric, the return/maximum drawdown (Ret/DD) ratio. The average and median Ret/DD will be computed across all 732 parameter sets for each strategy, giving a more robust picture of each indicator’s performance. For a more comprehensive comparison, the two strategies will be tested on three 4-hourly markets—GBPJPY, AUDJPY, EURAUD. For each parameter set, performance will be averaged across these three markets.
Keltner Channels employ an exponential moving average, which is more responsive to recent price action than other moving averages. The Keltner Channel is an indicator that helps traders determine trends, momentum, and potential reversal areas in a given market. It’s named after Chester Keltner, who first introduced it in the 1960s. A trader who knows how to utilize channels the right way can add a great tool to find more confluence factors for his/her price analysis. In this article I will talk about the Keltner Channel and the Bollinger Bands® – and which one you should use. Once a squeeze has occurred, a price breakout from the upper Bollinger Band would indicate the possibility of an uptrend in the future.
Bollinger Bands Pros
We all want a large sample of trades in our backtests, but practical limitations such as data availability often get in the way. Here I’ll explain why 30 trades is insufficient, and how you can use standard error to quantify the uncertainty arising from a small sample size. Your strategy’s optimization profile often reveals its robustness, helping you select strategies that will remain profitable in live trading. Here I explain why an optimization profile is important, and how you can easily obtain one using StrategyQuant’s optimizer.
- As a result, the movement of the indicator looks a bit smoother, with fewer outliers.
- ATR, used in Keltner Channels, takes the average of absolute changes in price, or an average of the true range.
- This is driven by the fact that the Bollinger Bands are more sensitive to market volatility and therefore produce more accurate trading signals.
The reward-to-risk ratio (RRR) is among the most important metrics that traders use to evaluate the potential… Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
Let’s take a deeper look at the top 5 parameter sets for each indicator. Both these parameters will be simultaneously optimized for each strategy, giving 732 parameter sets per strategy. Note that simultaneous parameter optimization is not a recommended practice in strategy development because it drastically increases the disk of curve fitting.
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As for Bollinger Bands, a simple moving average is used where the price data in the used period are each given equal weighting. This post will show you how to optimize the entry and exit parameters for a moving average crossover strategy. Finally, an intraday time filter will be added to help avoid false breakouts. Since most price action will be encompassed within the upper and lower bands (the channel), moves outside the channel can signal trend changes or an acceleration of the trend.
For this example, I have to go with the Keltner Channel, because I will always go with outside of the bands versus riding the bands in terms of strength of trend. Just a side note, assuming you are day trading, then the major gap down the next day would not apply because you would have closed your position. In the below chart example, we are reviewing a 5-minute chart of Ford with the default Keltner Channel settings of 20, 1 and the default settings for the Bollinger Bands. I figured I would just stick to the comparison and leave the number-crunching up to the mathematicians.
As John Bollinger acknowledged, “tags of the bands are just that, tags, not signals.” A tag (or touch) of the upper Bollinger Band® is not in and of itself a sell signal. A tag of the lower Bollinger Band® is not in and of itself a buy signal. Instead of using the true range, Bollinger Bands use standard deviation (STD) – the square root of the variance of a set of price movements over time. Because they utilise standard deviation, Bollinger Bands are slightly more responsive to volatility than Keltner Channels. When the range constricts, volatility is low; and when the range expands, volatility is increasing.
The Bollinger Bands is a widely used technical indicator that helps us identify an asset’s volatility and potential price movements. It was created by John Bollinger in the 1980s and has since become a popular tool among traders of all levels. If you’re forex basics a trader, you likely know that indicators are a valuable tool for identifying trends and finding entry and exit points. In this article, we’ll dive into the differences between the two, explain their components, and discuss which one is best.
The most well-known volatility channel is the Bollinger Band, though the Keltner Channel Indicator is another effective type as well. Over the last several years, multiple statistical studies and research papers have been published to understand the effectiveness of both these indicators in different market environments. In certain trading scenarios, you would choose the Bollinger Bands, while in other scenarios you will choose the Keltner Channels. As with the Donchian example, the opportunities should be clearly visible, as you are looking for penetration of the upper or lower bands. Dollar currency pair presented in Figure 3, we see that the price action has been mounting a bullish rise over the course of November, and the currency pair looks ripe for a retracement of sorts.
Keltner Channels Provide More Reliable Trading Signals for Long-term Trading in High Volatility Markets
Here, the trader can apply the STARC indicator as well as a price oscillator (Stochastic, in this case) to confirm the trade. The exponential moving average (EMA) – the middle line – of a Keltner Channel is typically 20 periods, but this can be adjusted if desired. As is the case with the Bollinger Bands, the Keltner Channels consist of three different lines. The middle line is by default a 20-day exponential moving average line of the price.
Readers must consider their financial circumstances, investment objectives, experience level, and risk appetite before making trading/investment decisions. Well, that curiosity led me on a fascinating journey of surveying over 1500 traders. Consequently, as stated above, Bollinger Bands have a greater potential than Keltner Channels for producing false signals. Hence, how you incorporate the signals from Bollinger Bands will completely be dependent on your overall trading strategy. A reversal signal which occurs in a very strong trend and where there was first a close above the upper Bollinger band is therefore more reliable than the same signal with Keltner Channels.
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 https://bigbostrade.com/ 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.
The Bollinger Bands® indicator is among the most reliable and powerful trading indicators traders can choose from. Upon close inspection, it seems like the general directional output seems to be much smoother for the ATR, though. The Bollinger Band® width often changes directions and, thus, indicates a change in market conditions more frequently. Tradeveda.com is owned and operated by NERD CURIOSITY MEDIA PRIVATE LIMITED. Trading and/or investing in financial instruments involves market risk. TradeVeda.com and its authors/contributors are not liable for any damages and/or losses caused due to trading/investment decisions made based on the information shared on this website.
