Introduction to Bollinger Bands & Keltner Channels
Bollinger Bands
Bollinger Bands, a technical indicator developed by John Bollinger, is used to measure a market’s volatility. and identifies “overbought” or “oversold” conditions.
In simple terms, this little tool tells us whether the market is quiet or whether the market is LOUD!
When the market is quiet, the bands contract and when the market is LOUD, the bands expand.
Look at the chart below. The Bollinger Bands (BB) is a chart overlay indicator meaning it’s displayed over the price.
Notice how when the price is quiet, the bands are close together. When the price moves up, the bands spread apart.
The upper and lower bands measure volatility, or the degree in the variation of prices over time.
Because Bollinger Bands measure volatility, the bands adjust automatically to changing market conditions.
The Bollinger Bounce
One thing you should know about Bollinger Bands is that price tends to return to the middle of the bands.
That is the whole idea behind the “Bollinger Bounce.”
By looking at the chart below, can you tell us where the price might go next?
If you said down, then you are correct! As you can see, the price settled back down towards the middle area of the bands.
What you just saw was a classic Bollinger Bounce. The reason these bounces occur is that the Bollinger bands act like dynamic support and resistance levels.
The longer the time frame you are in, the stronger these bands tend to be.
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.
You only want to trade this approach when prices are trend-less. So be mindful of the WIDTH of the bands.
Avoid trading the Bollinger Bounce when the bands are expanding, because this usually means the price is not moving within a range but in a TREND!
Instead, look for these conditions when the bands are stable or even contracting.
Keltner Channels
Keltner Channels is a volatility indicator introduced by a grain trader named Chester Keltner in his 1960 book, How To Make Money in Commodities.
A revised version was later developed by Linda Raschke in the 1980s.
Linda’s version of the Keltner Channel, which is more widely used, is quite similar to Bollinger Bands in that it also consists of three lines.
However, the middle line in a Keltner Channel is an Exponential Moving Average (EMA) and the two outer lines are based on the Average True Range (ATR) rather than on standard deviations (SD).
Because the channel is derived from the Average True Range (ATR), which is a volatility indicator itself, the Keltner Channel also contracts and expands with volatility but is not as volatile as the Bollinger Bands.
Keltner Channels serve as a guide for setting trade entries and exits.
The Keltner Channel help identify overbought and oversold levels relative to a moving average, especially when the trend is flat.
It can also provide clues for new trends.
Think of the channel like an ascending or descending channel, except it automatically adjust to recent volatility and isn’t made up of straight lines.
Like on previous point on Bollinger Bands, you’re probably guessing that Keltner Channels are basically cut from the same cloth. Well, almost.
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.
Keltner Channel vs Bollinger Bands, what’s the difference?
The difference is the way Channel Lines are calculated.
Keltner Channel uses Average True Range and Bollinger Bands uses Standard Deviation.
And if you compare the two, you’ll realize Keltner Channel is “smoother” compared to Bollinger Bands.
Reference:
https://www.babypips.com/learn/forex/bollinger-bands
https://www.babypips.com/learn/forex/keltner-channel
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