Keltner Channel vs. Bollinger Bands in Forex Trading

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Contributor, Benzinga
June 20, 2023

Technical indicators provide a compass for the forex trading world, offering traders insight into patterns and helping them navigate the ups and downs of the markets. The Keltner Channel and Bollinger Bands are commonly used technical indicators that help traders identify trends, volatility and potential entry and exit points. But what are their differences, and which is better for your trading style? 

Here, Benzinga compares Keltner Channel vs. Bollinger Bands, explains how they work and discusses their pros and cons. You will better understand these two indicators and how to incorporate them into your trading strategy.

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What is the Keltner Channel?

A Keltner Channel is a technical indicator that helps identify trends, support and resistance levels, breakouts and reversals. It creates a band around the price action based on the market's average true range (ATR), which measures the market's volatility. 

The Keltner Channel consists of three lines: a middle line that is an exponential moving average (EMA) of the price and upper and lower lines derived by adding and subtracting a multiple of the ATR from the middle line. The default settings for the Keltner Channels are a 20-period EMA and a 2x ATR. 

When the price is above the upper line, it signals an uptrend; when below the lower line, it is a downtrend. When the price is within the channel, it signals a range-bound market. The upper and lower lines can act as dynamic support and resistance levels, where the price tends to bounce off or break through. When the price breaks out of the channel, it signals a potential trend continuation or reversal, depending on the direction of the breakout. The channel's width can also indicate the market's volatility, with a narrow channel showing low volatility and a wide channel, high volatility.

Pros

  • Provides a visual representation of price volatility and trend strength
  • Adapts to changing market conditions by using the ATR, which reflects the market's current volatility
  • Can be applied to any timeframe, market or trading style

Cons

  • Can generate false signals in choppy or noisy markets, as the price can whipsaw around the channel lines
  • Lags behind the price action, as it is based on moving averages derived from past data

What are Bollinger Bands?

Bollinger Bands are widely used technical analysis tools that create a band around the price action based on standard deviation calculations. The standard deviation gauges the dispersion of the price movements from the mean over a time period. The band consists of three lines: the middle line is a simple moving average (SMA) of the price, while the upper and lower lines are calculated by adding and subtracting a multiple of the standard deviation from the middle line. By default, the Bollinger Band has a 20-period SMA and a 2x standard deviation.

Bollinger Bands help spot trends, support and resistance levels, breakouts and reversals using similar mechanisms as the Keltner Channel. 

Pros

  • Captures sudden price movements and volatility spikes using the standard deviation 
  • Applicable to any timeframe, market or trading style 
  • Can be combined with other indicators or strategies to enhance trading performance

Cons

  • May generate false signals during choppy or noisy markets
  • Lags behind the price action since it relies on past data
  • Subjective selection of optimal settings for the SMA and standard deviation periods and multiples; different settings may produce different results

Comparing Keltner Channel Indicators and Bollinger Bands

While the Keltner Channel and Bollinger Bands are similar in their effectiveness for assessing price volatility, they differ in their underlying calculations and visual representations. 

Average True Range vs. Standard Deviation

Keltner Channels and Bollinger Bands mainly differ in how they measure the channel's width. The Keltner Channel uses the ATR, the average range of price movements over a period. In comparison, Bollinger Bands use the standard deviation, which is the dispersion of price movements from the mean over time. The ATR reflects the current volatility of the market, while the standard deviation reflects how much the price deviates from its mean. As a result, the ATR is more stable and consistent, whereas the standard deviation is more responsive and variable.

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. 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.

Reading Market Volatility

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.

Reliability of Trading Signals for Long-Term Trading in High-Volatility Markets

Keltner Channels and Bollinger Bands can be used to generate trading signals for long-term trading in high-volatility markets by looking at the breakouts and reversals of the price from the channel lines. When the price breaks out of the channel, it signals a potential trend continuation or reversal, depending on the direction of the breakout. However, the Keltner Channel tends to be more reliable and less noisy, as it filters out minor price movements and focuses on major trends. Bollinger Bands tend to be more erratic and more noisy, as they capture sudden price movements and volatility spikes.

Elevate Your Trading Game With the Right Indicator

The Keltner Channel and Bollinger Bands are valuable indicators for forex traders to assess price volatility, identify potential trading opportunities and manage risk. The Keltner Channel, based on the ATR, is well-suited for short-term trend analysis and capturing short-term price movements. Bollinger Bands, relying on standard deviation, provide insights into market volatility and potential overbought or oversold conditions. Traders should evaluate their trading style, market conditions and the strengths and weaknesses of each indicator to choose the most appropriate tool for their strategies.

Frequently Asked Questions

Q

Which is better, Keltner or Bollinger?

A

The choice between the Keltner Channel and Bollinger Bands depends on your preferences, trading style and the market conditions being analyzed. Both indicators have strengths and weaknesses, so you need to understand their characteristics and experiment to find what works best for you.

Q

Which indicator works best with the Keltner Channel?

A

The Keltner Channel can be combined with various indicators to enhance its effectiveness. Commonly used complementary indicators include the average directional index (ADX) and the relative strength index (RSI).

Q

What is the squeeze of Bollinger Bands and Keltner Channels?

A

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.

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Anna Yen

About Anna Yen

Anna Yen, CFA is an investment writer with over two decades of professional finance and writing experience in roles within JPMorgan and UBS derivatives, asset management, crypto, and Family Money Map. She specializes in writing about investment topics ranging from traditional asset classes and derivatives to alternatives like cryptocurrency and real estate. Her work has been published on sites like Quicken and the crypto exchange Bybit.