If we have previously learned how to use Bollinger bands and Keltner channels, then we will try to make a comparison between Keltner channels vs. Bollinger bands.
If you look at the display on the graph, it seems these two indicators together have three lines, top, middle, and bottom.
The other equation is that both of them use a moving average for the middle line, so actually these two indicators can give direction to the ongoing trend.
But because both of them use different calculations on the outline of the indicator, where the Keltner channel uses Average True Range, and the Bollinger band uses standard deviations, the distance between the two outlines is different.
Keltner channels tend to be close to one another, Bollinger bands are wider than one another.
Of course, this will provide a different analytical view, then which is the best of both?
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Maybe some traders will assume that the Keltner channels vs the Bollinger bands is the same, and there is another indicator that is similar, that is the envelope indicator.
But here we will talk about the Keltner Channel.
Indeed, there is a similarity between the Keltner channel vs Bollinger band, but the Keltner channel uses exponential moving average and average true range, while Bollinger band uses a simple moving average, and you know the difference of the two.
Calculation Keltner channel
To calculate the Keltner channel the steps taken are:
- First, choose a time period for exponential moving averages.
- Second, choose a time period for the Average True Range (ATR).
- Third, choose a multiplier for ATR.
Middle channel: 20-day exponential moving average Top Channel : 20 days EMA + ( 2 x ATR (10) ) Bottom channel: 20 days EMA - ( 2 x ATR (10) )
The above calculation is the default setting.
You can adjust the settings to get the best settings.
Because moving averages are lagging indicators, moving averages with long periods will have more lag and short period moving averages will have less lag.
ATR is a basic volatility setting. Shorter time frames, such as 10, giving more volatile ATRs.
A longer period of time, let say 50, will smooth this fluctuation to giving a more constant ATR reading. Multipliers have the greatest effect on channel width.
If you change the multiplier with a larger number, the channel will be wider, if you use a smaller multiplier, the channel will narrow.
For this setting you can adjust it as a dynamic resistance support limit, multiplier 2 is usually good enough to provide a dynamic resistance support function.
The main function of Keltner channels
- The Keltner channel can function as dynamic resistance support when the market is ranging
- By using Exponential moving averages, this indicator also gives a trend direction.
- When prices reach outside the channel, this indicates that a strong trend has occurred, this means that volatility is high, it is often only temporary and usually returns will be in the channel.
Although sometimes there is a bias analysis, the Keltner indicator also gives an indication of dynamic support resistance, especially when in ranging conditions.
The upper channel is resistance, and the lower channel is a support area.
When the candlestick breaks the top channel then it gives a high possibility with a strong uptrend.
Conversely, when the candlestick breaks the bottom channel, it gives a high chance of a strong downtrend
Meanwhile, the slope of the Keltner channel always moves to adjust to the direction of the trend, this is because this indicator uses EMA as a basis for calculation so that it also follows the direction of the trend
Bollinger bands are also indicators that function to measure price volatility.
But this gives a smoother line than the Keltner channel because it uses a simple moving average as the basis for the calculation.
I have written about Bollinger band calculation before, you can check again here
The main function of Bollinger bands is:
- The upper and lower bands are dynamic areas of resistance support, especially in ranging conditions.
- Because it uses a simple moving average as a basis for calculations, this is also to determine the direction of the trend.
- When the two bands come close to each other, or squeeze prices, it is possible to indicate an increase in volatility.
- When the uptrend, middle line functions as support, and when the downtrend, the middle line functions as a resistance.
This Bollinger band uses a simple moving average for the middle line, so it is smoother compared to EMA.
And in this calculation using the standard deviation as a multiplier.
The greater the standard deviation, the wider the upper band and lower band, conversely the smaller the standard deviation the narrower the upper band and lower band.
So, for example, you change the default deviation standard 2 to 1, then you will see the upper band and lower band lines close together.
But if you change to 3 than the upper band and lower band lines will move away from each other, and provide a farther upper and lower band from the middle band.
Keltner channels vs Bollinger bands wich is better?
Maybe after learning about the Keltner channel and the Bollinger band, it will come to mind, which is the best of both.
Actually this is the same as we compare between SMA vs EMA because the base calculation of the two uses moving average indicators.
Where Bollinger bands use SMA and Keltner channels use EMA, the only major difference is in the multiplier.
Bollinger bands with standard deviations and Keltner channels with ATR.
But to compare both we will take an example.
Below is the image at pair GBP/USD timeframe H4 with the Keltner channel standard setting.
In the image above we see that the upper channel and lower channel function as dynamic resistance support, but sometimes prices cross the channel.
As we see above, the price breaks the top channel and is an indication of a strong upward trend. Even though it is only temporary and eventually price back in the channel.
In this case, we also pay attention to the slope of the middle channel which is the EMA line. When that line show an upward slope this means it also functions as a support.
And we can also see several times the channel becomes of support and resistance zone.
Marked with the round color of the medium spring green, there are five times this channel functions well as dynamic support resistance.
And here image GBPUSD H4 with Bollinger band standard setting
The image above uses the Bollinger band, we can see there are some differences in the use of the indicator function as dynamic resistance support and also in measuring volatility.
In this case, we see twice the price of the Bollinger band breaking line, giving a sign of strengthening volatility.
But on the other hand, the Bollinger band only gives a sign of valid resistance as much as four times.
Thus we draw the conclusion that to measure the volatility of Bollinger bands gives a better sign. But as support resistance, the Keltner channel gives a better sign.
This is just an example, in practice maybe you will find differences in market conditions and periods used may give a different sign.
Bollinger band Keltner channel squeeze indicator
The Bollinger band Keltner channel squeeze indicator can be an indicator to find stocks or pairs that are trading in a consolidation phase. Bollinger bands, Keltner channel strategy is a good combination strategy.
This condition is indicated by narrow price movements. If a pair or stock is still trading within this range, it will be difficult to make a profit and make it less attractive. When this phase ends the price movement will explode even more strongly.
Traders can combine the two volatility indicators, Bollinger Band and Keltner Channel.
Bollinger Bands take the moving average data, using standard deviation. The narrower the band, the lower the volatility.
The Keltner channel uses exponential moving averages and uses the Average True Range (ATR) as the distance. Usually, the standard deviation of BB is more sensitive to volatility than ATR.
Which Keltner channel vs Bollinger band is the best? both, of course, have their advantages and disadvantages, respectively.
I myself prefer to use the Keltner channel rather than the Bollinger band.
Because, in my opinion, it is better as dynamic resistance support, this makes it easy to make a trading plan.
In the end, it depends on the choice of each trader, but it’s best to still use another toolbox that functions as an oscillator.
The timeframe also affects the results of the analysis, this adjusted the trading style.
Will often get fake signals if he chooses M5 timeframes while working as a day trader.
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