Lesson 27: How to Use Bollinger Bands and Keltner Channels in Your Trading

For our first try, we set a condition to fire the market buy order only if the trend given by the Supertrend 14/3 at 4-hours time frame is upward. First, as discussed at the simulation, some trades show very important loss and the major improvement is definitely to implement Stop-loss and Take-profit management. The total return has reached a maximum value of 1.669 so a profitable outcome should be reach with an adapted risk management. We propose to test this asumption using the backtesting capacities of Superalgos. It doesn’t matter which timeframe you utilize (assuming you are using one smaller than the daily), you need to trade with the major relocations Bollinger Bands .

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• Because of the inherent variances in volatility measurement, both indicators are likely to provide various trading profiles.
• So, you can see how it bounces up and down off the upper and lower Bollinger band.
• Similar to Bollinger Bands, the Keltner Channel can be used in both breakout and fading strategies.
• Here we will use QuantAnalyzer’s Portfolio Master to build a portfolio consisting of high performing, uncorrelated strategies.

However, Keltner Channels are less suitable for signaling a potential trend reversal. This is because a strong trending price can be positioned above its upper channel for a long time. Keltner Channels are less sensitive to strong market fluctuations because they also average the outer channels on the middle line (which is itself best cryptocurrency brokers an average). As a result, the outer channels of these indicators take a little longer to be broken at the start of a new trend. When price volatility suddenly decreases, the extreme bands of the Bollinger Bands will converge faster. In this way, a narrow trend channel emerges more quickly than with the Keltner Channels.

It then reached the lower support bands of the indicator when the price crashed from $65,000 down to $30,000 and climbed through them again briefly from September until November 2021. We can see that Bitcoin was trading above the upper band when it rose from $10,000 to $60,000 near the end of 2020 and the start of 2021. The Keltner Channel indicator was invented by Chester Keltner, an American grain trader. The indicator name is a combination of Keltner’s last name and the word “channel” as the price flow through the indicator has the appearance of a channel. The indicator was introduced in the 60’s in Keltner’s book “How to Make Money in Commodities”. Now our last improvement idea is about the Stop-loss and Take-profit management.

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Since both indicators tend to produce correlated strategies, it is not advisable to simultaneously trade both in your portfolio. Tradeveda.com is owned and operated by NERD CURIOSITY MEDIA PRIVATE LIMITED. 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.

• If you use a different strategy logic, or use the indicators in a countertrend manner, your test results may well vary.
• Technical analysis does not have a single indicator that can be employed in all trading settings or for all trading reasons, as you may be aware.
• Combining both indicators can also be beneficial, such as by examining different time frames like 15-minute charts and daily charts, or applying them selectively to specific securities.
• It features a more complete description and addition of complex trading strategies with a Github page dedicated to the continuously updated code.

The calculation differs in that which Keltner bands use ATR while Bollinger Bands use standard deviation to determine the range of the upper and lower levels. The Keltner Channel help identify overbought and oversold levels relative to a moving average, especially when the trend is flat. With 55 trades and a hit ratio of 55%, we observe a total loss of the initial capital. We have superposed a Supertrend 14/3 indicator to try to identify potential improvements to make this strategy profitable. We use Knime Analytics to perform basic simulation of the Keltner/Bollinger strategy.

Keltner Channel Scalping Strategy

A few investors may try to buy stocks when the price falls below the lower band and sell when the price rises above the moving average. Others may buy if the price increases over the upper band and sell if it falls below the lower band. The location of these bands indicates the strength of the trend and the potential high and low price levels to be expected soon. The Bollinger Bands Indicator, like the Keltner Channels Indicator, has three lines. This can be a specific application of the broader volatility channel concept. All information on The Forex Geek website is for educational purposes only and is not intended to provide financial advice.

What is the Bollinger Bands Indicator?

Similar to the Keltner Channels Indicator, the Bollinger Bands Indicator also comprise of three lines. If you are a day trader presented with this information you may decide to sit on the sidelines until the squeeze is over as the bands show you are in a choppy market. Knowing this, you can decide if you will use a range trading strategy, a breakout strategy, or a way to quantify the impulse leg needed to trade trade a correction.

The return at individual trades shows a distribution with a clear orientation to non-profitable outcome. Consequently, if your aim is to maximize trading opportunities using these indicators, the Bollinger Bands Indicator would be better suited for your needs. However, it is important to note that there are specific trading scenarios where the application of Keltner Channels would be more appropriate. Those long decisive runs which are the support of technical analysis seem to happen less and less. Keltner Bands are one of the many volatility bands, but unfortunately, we found the bands not very useful. However, we didn’t spend much time studying the bands, and some readers might offer better ideas to test.

The indicators are noticeably different and it is difficult to establish a consistent relationship between them. Due to the increased volatility of the standard deviation, I believe the Bollinger Bands tend to encompass the Keltner Channels when the market is trending, and vice versa when the market is flat. Both the moving average and average true range use the same lookback period.

Keltner Bands explained: What are Keltner Bands/Channels?

Under this strategy, options traders hope to book some profit when the volatility in price gets back to average values. Which of these two volatility indicators provides more accurate insights for making trading decisions? The Bollinger Bands fxtm review Indicator is more popular and has a higher adoption rate than the Keltner Channels Indicator. This is driven by the fact that the Bollinger Bands are more sensitive to market volatility and therefore produce more accurate trading signals.

Hence, I would recommend against using Bollinger Bands in such trading conditions. If you are an active trader or a scalper looking to profit from every trading opportunity that the market presents, Bollinger Bands would better suite your trading personality. Since this indicator reacts quickly to the price changes in the market, it tends to provide more trading opportunities. In the case of Donchian Channel, a breakout is indicative that the price has broken out of its recent trading range and a new trend may be developing.

In this article, we take a look at Keltner Bands to see what it is, how they are calculated, how they differ from Bollinger Bands, and if it’s possible to make money on Keltner Bands. Bollinger Bands are more sensitive to market volatility as explained above. In terms of using and interpreting the Keltner Channels, there is no difference from the Bollinger Bands. The indicator can just as easily be used to confirm trends, discover new trends or signal the end of existing trends. Unlike the Bollinger Bands where a standard deviation is used, the Keltner Channels project the actual width of the price range. When an asset is trending higher, the price should regularly reach or approach the upper band and occasionally move past the upper band.

Their creator, Richard Donchian, was a conservative trader, and he did not create this indicator with the intension of using it for analyzing highly volatile assets. Bollinger Bands, however, are well equipped to do so and are dynamic in being able to adjust to highly volatile asset markets. Additionally, Bollinger bands show the dispersion from the mean (the average of the price for review trading systems a given period), whereas the Donchian Channel shows the actual market range. Converting your trading idea into an algorithm is the first step towards reaping the benefits of automated trading. This guide will cover the creation of a simple moving average crossover algorithm, without any actual programming. Bollinger Bands are great at detecting overbought and oversold conditions.

How to Use the Supertrend Indicator

Bollinger Bands’ outer bands are based on standard deviation rather than accurate average range and may be more volatile than Keltner channels. As a result, Keltner Channels could be less likely to generate a misleading trade signal in a high-volatility market situation for longer-term trading. 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.

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Know where you are, where price is in relation to the Keltner channel and then take it off the screen. It is going to rip through all these levels and it is just going to do its own thing, which is why supply demand is the most important thing. If there is massive supply coming in you are going to see the market fall through the floor regardless of what your indicators are saying. Similarly, if there is huge demand coming in it is just going to rip to highs, no one is going to care what any oscillators and moving averages, Keltner channels are saying.

Depending on your requirements, you may find Bollinger Bands preferable to Keltner Channels and vice versa. Bollinger Bands will also prove to be a better indicator of choice when trading high volatility assets. Donchian Channels do not include the current price of an asset in their calculation to produce the upper, lower, and middle bands, but instead, rely on the previous rates of the asset in the market. This can be detrimental to trading a highly volatile asset because the most recent price is an important indicator in such markets. Despite its cool name, the Supertrend indicator often seems to slip under the radar. Here I explain how it’s calculated, and combine it with moving averages to produce a simple trend following strategy.