What is Keltner Channel: Alternative to Bollinger Bands
After this initial break, the stock met resistance near the 20-day EMA from mid-May until early August. The inability to even come close to the upper channel line showed strong downside pressure. This indicates that it is a good time to sell an option as the volatility is high. Middle LineThe middle line of the Keltner Channel Indicator calculates andrepresents the exponential moving average , over the selected period, for the price of an asset. Keltner Channels use ATR to calculate the upper and lower lines. The general concept is that the farther the closing price is from the average closing price, the more volatile a market is deemed to be, and vice versa.
If the candles start to break out above the TOP, then the move will usually continue to go UP. Breakouts from the Keltner Channel act as strong hints where the price is running off to next. In a RANGING MARKET, price usually swings back and forth between the top and bottom lines. This middle line is pretty significant since it tends to act as a pullback level during ongoing trends. Keltner Channels show the area where a currency pair normally hangs out. 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.
Example #1 – Riding the Trend
Once the move started, I would have to say that both the Bollinger Bands and Keltner Channels did a great job allowing the trend to develop. In this particular example, it was much clearer to me using the Keltner Channel that Ford was done once it hit its peak. If you zoom in on the example, you can see that there were two green bars and one red bar that were completely outside of the envelopes.
Channels can also be used to identify overbought and oversold levels when the trend is flat. Also similar to the Bollinger Band® technical indicator, STARC bands are calculated to incorporate market volatility. Developed by Manning Stoller in the 1980s, the bands will contract and expand depending on the fluctuations in the average true range component. The main difference between the two interpretations is that STARC bands help to determine the higher probability trade rather than standard deviations containing the price action. Simply put, the bands will allow the trader to consider higher or lower risk opportunities rather than a return to a median.
Keltner Channels are volatility-based envelopes set above and below an exponential moving average. This indicator is similar to Bollinger Bands, which use the standard deviation to set the bands. Instead of using the standard deviation, Keltner Channels use the Average True Range to set channel distance. The channels are typically set two Average True Range values above and below the 20-day EMA. The exponential moving average dictates direction and the Average True Range sets channel width. Keltner Channels are a trend following indicator used to identify reversals with channel breakouts and channel direction.
How to Use Keltner Channels as Dynamic Support and Resistance Levels
The general strategy is to buy if the price breaks above the upper band or sell short if the price drops below the lower band in the first 30 minutes after the market opens. When an asset istrending lower, it should regularly reach or come close to the lower band and sometimes even move past it. The price should also stay below the upper band and will often stay below the middle band or just barely push above it. Keltner Channels are useful because they can make a trend more easily visible. When an asset istrending higher, its price should regularly reach or come close to the upper band and sometimes even move past it. The price should also stay above the lower band and will often stay above the middle band or just barely dip below it.
The best time to open long and short trades is when Bitcoin’s price goes surpasses or drops below the two envelopes. Commodity and historical index data provided by Pinnacle Data Corporation. The information provided by StockCharts.com, Inc. is not investment advice. For this reason, many traders in the energy markets, which are known to be more volatile in nature, prefer to use Keltner Channels over Bollinger Bands. Lower lineThe lower line of the Keltner Channelconnects the price points that are double the average true range, below the EMA or the middle line. Upper LineThe upper line of the Keltner Channelconnects the price points that are double the average true range, above the EMA or the Middle Line.
The most well-known volatility channel is the Bollinger Band, though the Keltner Channel Indicator is another effective type as well. Whereas the standard deviation component of Bollinger Bands gives enough of a range between the upper and lower bands to better handle significant gaps that reverse sharply and range bound markets. However, as the Bollinger Bands are calculated using standard deviations, the bands do a much better job of filtering out the noise within a range bound market. Therefore, in the snap back reversal, Bollinger Bands are more suitable as the indicator is based on standard deviations. The crazier the action, the wider the Bollinger Bands will expand, which will clearly display the breakdown if the stock starts to give it up. The outer bands are based on the standard deviation of price fluctuations.
Using with StockChartsACP
When using Keltner Channels, the default setting is usually 20 and a multiplier of 1. Also, you can change the bands style by selecting whether you want the average true range , true range , or the range. The Keltner Channel indicator is measures volatility based on the highs and lows of an instrument’s price.
- Trading highly-correlated strategies is detrimental to your portfolio’s risk-adjusted returns.
- Typically, the Keltner Channels tend to be tighter than Bollinger Bands.
- In Figure 5, we see a very profitable opportunity in the British pound/U.S.
- The idea is to enter a trade at the start of the move, and as a result, you may have a higher number of losers, but you will catch the bigger moves to compensate.
Thank you Rayner, that was a very informative article on how to use the Keltner Channel. I’m fairly new at this and still paper trading, trying to get my sea legs. With that said, is this tool applicable to stock and option trading? If it is, I will incorporate it into my chart analysis.I will definitely keep you posted on my progress and hopefully that input can assist you and your community. The volatility of the market moves in cycles, from a period of low volatility to high volatility and vice versa.
This seems to have the same working nomenclature with CAP trading channel. I believe the concepts can be applied the same regardless of timeframe as long as there’s sufficient liquidity in the markets. So far out of the hundreds of price action mentors out there, there are like only 2 that i’ve come across who believes in verifying their results and have made them available. This means the best time to do it is when the volatility of the market is low. If the market is in a range, you can “buy low and sell high” within the boundaries of the range. You don’t buy just because the price is at the upper band of the Keltner Channels.
What is Keltner Channel: Best Alternative to Bollinger Bands for Bitcoin (BTC)
Breakouts from the Keltner Channel act as strong hints where price is running off to next. Rayner Teo is an independent trader, ex-prop trader, and founder of TradingwithRayner. Nice one i know this can work as a strategy for some people while forex binary options brokers trading. Insert the Keltner Channels and 200-period Moving Average on your charts. On hindsight, it’s easy to identify the current market condition. That’s why you need another signal to tell you the market is likely to reverse higher.
Defining the Squeeze
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. The ability to efficiently trade a diversified portfolio of strategies is one of the biggest advantages of algorithmic trading. Here we will use QuantAnalyzer’s Portfolio Master to build a portfolio consisting of high performing, uncorrelated strategies. Trading highly-correlated strategies is detrimental to your portfolio’s risk-adjusted returns.
The Channel-Cross works best when the general volatility is low – when the trend does not fluctuate back and forth a lot. When volatility increases, the accuracy of the Channel-Cross decreases because both channels will cross each other frequently. Thus, the Keltner Channel projects the true width of the price range.
Using the methods described above, traders and investors can identify the trend to establish a trading preference. Bullish trades are favored in an uptrend and bearish trades are favored in a downtrend. A flat trend requires a more nimble approach because prices often peak at the upper channel line and trough at benninga financial modeling the lower channel line. As with all analysis techniques, Keltner Channels should be used in conjunction with other indicators and analysis. Momentum indicators offer a good complement to the trend-following Keltner Channels. This is not to say that the price action won’t go against the newly initiated position.
IBM dipped below the lower channel line three times from late May until late August. The stock did not manage to reach the upper channel line, but did get close as it reversed in the resistance zone. Bollinger Bands are more volatile than Keltner channels because their outer bands are based on standard deviation rather than the average true range. dynamic stop loss For this reason,in a high volatility market environment, for longer-term trading, Keltner Channels are LESS likely to give a false trading signal. With an exponential moving average as its foundation, Keltner Channels are a trend following indicator. As with moving averages and other trend-following indicators, Keltner Channels lag price action.
This is backed by the fact that once the price starts breaking out of the bands, it would mean a relaxation of the squeeze and the possibility of high market volatility and price movement in the future. Bollinger Bands® are most commonly used as a trend-following indicator. When the price stays close to the outer bands, it signals a strong trending market. Envelope channel has evolved into a generic term for technical indicators used to create price channels with lower and upper bands. Although Bollinger Bands® are more widely known, Donchian channels, Keltner channels, and STARC bands have proved to offer comparably profitable opportunities.