The Bollinger Bands and keltner channels share many similarities. Both indicators can be used for setting up entry and exit points and to set stop losses. The indicators may also form part of a cohesive trading strategy that also accounts for aspects such as momentum, volume, as well as the overall trend.
There are, however, some important differences between Bollinger Bands and keltner channels that we will explore in this article.
First, let’s look at Bollinger Bands and how the upper and lower envelopes are calculated.
The Bollinger Bands widen and contract based on price movement. The upper and lower band are based on standard deviations and the middle line is the moving average of the security.
Keltner channels also widen and contract, but its bands are based on true ranges instead of standard deviations.
You can compare the Bollinger Bands and the keltner channels visually. Bollinger Bands form wider ranges than keltner channels and offer fewer signals, while keltner channels tend to follow the price movement more closely.
Despite their differences in calculations, both offer the same implications: when price is trading above the upper envelope on either indicator, this is a sign of strength. When prices consistently exceed the lower band, this is a sign of technical weakness.
For finding trading opportunities with either indicator, you can buy once price meets the moving average and sell once it reaches the higher envelope.
For setting a stop loss, you can place it slightly below the lower envelope for Bollinger Bands as well as keltner channels. Doing this will prevent the stop from being filled prematurely while also protecting your investment from the volatility in the marketplace.
In summary, both indicators give the same signals, but keltner channels will tend to offer you more signals than Bollinger Bands. Both can be compared side by side to get the complete picture.