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Introduction to Bollinger bands, Keltner Channel
and their Best use in trading in 2021
trendingbrokers.com/keltner-channel
A set of trendlines define the t echnical
analysis tools called as Bollinger Bands. There
are 2 standard deviations, positive and negative,
staying remotely from a simple moving average
(SMA) of an assets price. However, it can be
adjusted as per the needs of clients. John
Bollinger was the person behind the development
of the tool. He also filed for its copyright. It
helps in designing opportunities for traders and
achieving success in the financial market. It
identifies the probability of assets, whether
they were overbought or oversold in the market.
On the other hand, Keltner Channel is an
indicator used for technical analysis. It
displays the channel line along with the central
moving average line at a distance below and
above. The indicator was named after Chester W.
Keltner. He described the phenomenon in his
book. People who heard about the indicator from
the man himself started using the term. However,
some say he didnt claim any idea for the
original idea. As per Keltner, it is a 10- day
moving average rule for trading. According to
him, the central line was a simple moving
average of ten days of the typical price. That
price is the average of low, high and
close. Process of calculating Bollinger Bands
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One has to compute the simple moving average
(SMA) of an asset or security available. It is
advisable to use a 20-day SMA, as it helps
average out the closing price, in the beginning,
twenty days. It is for the first data point.
Interestingly, the next data point would be
dropping at the earliest rate. You can add the
price on the 21st day and get the average. It
continues that way. The securitys price standard
deviation will be obtained next. Standard
deviation can be termed as average variance
mathematical measurement that prominently
features in finance, accounting, economics and
statistics. For a particular data set, the job
of a standard deviation is to measure how average
value is causing spread out numbers. You can find
the variances square root. That is complex to
calculate. Thats the average of the difference
of the squares of the mean. Now, it is important
to multiply the value of standard deviation by
two. Then it is essential to subtract and add
that amount along the SMA from each point. Those
produce lower and upper bands. Why are
Bollinger Bonds important? Bollinger Bands are an
unspeakably famous technique used by traders.
Many investors believe that the overbought market
is directly proportional to the prices moving
closer to the upper band. And if the prices move
toward the lower band, that exhibits the oversold
market. A set of 22 such rules were followed by
John Bollinger when he used bands as a trading
system. Calculation in Keltner channel Traders
can calculate the Keltner channel following the
following types Start by selecting the
exponential moving averages length. Now, choose
the ATRs(Average True Range) time periods. Then
select the multiplier for ATR The ATR represents
the basic volatility setting. There are various
short timeframes like 10 that are capable of
producing vast, volatile ATR. As a result, there
is a fluctuation of 10- period volatility. On
the other side, the longer time frames like 100
iron out these fluctuations and produce better
and constant ATR readings. The channel width
sees the biggest effect by the multiplier. By
changing it from two to one, the width of the
channel will be cut in half. On the other side,
if it is increased from 2 to 3, there will be a
50 per cent jump in the channel width. The
squeeze on Bollinger Bands
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The squeeze acts as the Bollinger Bands central
concept. When the bands come so close that they
start constricting the moving average, that
situation is called a squeeze. A indicates the
low volatility. It shows the potential of future
trading opportunities and is seen as a signal of
future increased volatility. On the contrary,
the more the bands grow, theres a burgeoning
chance of decreasing volatility. Thus, thats an
opportunity to exit the trade. Meanwhile, a
trader should not consider these conditions as
trading signals. The price does not indicate the
direction change or movement of the
market. Breakouts in Bollinger
Bands Interestingly, the maximum price action,
approximately ninety per cent of them, happens
between the two bands. Any breakout that takes
place below or above the bands is considered a
major event. However, investors biggest mistake
is considering the price hitting one of the
bands as the chance to sell or buy assets. The
breakouts offer no clue regarding the direction
and the movement of the future price. Bollinger
Bands limitations One must know that Bollinger
Bands do not work as a standalone trading system.
Instead, they provide traders and investors with
information regarding price volatility. Thus, it
is essential that people do not fall for the
single indicator and use others. That helps in
offering different data for locating accurate
signals for trading in the market. Some of them
picked by John Bollinger are M ACD and RSI. He
favoured these techniques for on- balance
volume. They get computed from SMA (Simple
Moving Average). Moreover, they similarly weigh
old price data as the new one. It means that
outdated data may dilute the new information. Mor
eover, the use of two standard deviations and
20-day SMA seems arbitrary to an extent. Thus,
that may not function smoothly in every situation
or condition as required. It is the sole
responsibility of traders to adjust their
standard deviation and SMA through assumptions
and find ways for the adjustments. Keltner
channel methods and usage Traders can utilise the
Keltner channel in multiple ways as they please.
It all depends on the settings used by the user.
The bigger lag in the indicator is directly
proportional to a longer EMA. The channel wont
display any change to the price change in that
case. On the flip side, the shorter EMA reflects
that the bands react swiftly to price changes.
However, a trader cant depict the direction of
the trend. Thus, that can make trading slightly
difficult.
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A larger channel may occur if a bigger multiplier
creates the ATR. The bands will be hit less often
by the price. A band will be close together if
the multiplier is smaller. Moreover, the price
will exceed the bands or reach them. Traders can
use the following methods to deploy the potential
Keltner channels- A plunge below the lower band
exhibits the price weakness. Moreover, it
indicates the downtrend, precisely when the
angle of the channel is downward. The channels
angle assists in identifying the direction of the
trend. For example, if the channel is rising,
that will mean so are the prices. On the other
hand, the sideways channel or falling displays a
regular fall in prices or moving sideways. If
the price hits the upper band continuously but
does not do that with the lower band however,
when the price reaches the lower band, that would
mean the uptrend is ending shortly. The price
strength is showcased by when the price moves
above the upper band. It would mean that the
uptrend is in the fray, more so when the
channels angle is upwards. Moreover, if the
price keeps on hitting the lower band, without
reaching the upper band, and when it finally
picks up to hit the upper band, that would mean
that the downtrend of the market is finally
ending. There may be chances that the price may
oscillate between upper and lower bands. In such
situations, traders have the opportunity to
utilise bands as resistance and support. They
can prefer buying when the prices are low or
reach the lower band. When it goes higher, people
have a chance to short that asset. When the
prices start to plunge again, thats the time to
purchase. The cycle continues. It again
reaches the upper band and plunges back, creating
situations for better trading. If the price
breaks below or above the channel after the
sideways period. And when it begins to angle in
a similar way, it would mean a new signal is
underway. Thats a breakout direction. Bollinger
Bands v/s Keltner Channels One may find both the
indicators quite similar. Bollinger Bands utilise
the standard deviation while Keltner Channels
use ATR for calculating the lower and upper
bands. Traders can interpret that in their
possibilities. However, since the methods
of calculations are slightly different, the end
results that may come can be distinct. So,
traders need to pay attention to that aspect of
trading. Limitations Keltner Channel The setting
of the Keltner Channel ensures its usefulness for
traders. Thus, it is up to the users how they
brought into use the indicator for their
investment purposes. Hence, their approach
should be nuanced for making better profits.
However, the Keltner Channel wont work smoothly
if the bands are too far apart or narrow.
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Keltner Channel works great in conjunction with
analysis of price action, technical indicators
and fundamental analysis while working for a long
term. Moreover, Keltner Channel can offer some
trade signals besides identifying the trend
direction. Meanwhile, the band may not act as
resistance or support. Also, there may be a
little ability of forecasting, thats not too
helpful for traders. Moreover, theres no
guarantee that the price hitting one band or two
ATRs will yield the results required by a trader.
Thus, theres no promise of something
significant happening for traders. Conclusion Bot
h Keltner Channels and Bollinger Bands are
important indicators for a trader. Thus, an
investor should study them appropriately before
deciding to use them to acknowledge the markets
direction. When used together, both indicators
can exhibit better information to a trader.
However, their calculations are different, so
that aspect should also be kept in mind before
going for an investment. You can start your
trading journey with the most trusted brokerage
firm P rimeFin.