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 ATR to set channel distance. The channels are typically set two Average True Range values above and below the 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. Channels can also be used to identify overbought and oversold levels when the trend is flat. The day SMA of the High-Low range was added and subtracted to set the upper and lower channel lines. Linda Bradford Raschke introduced the newer version of Keltner Channels in the s. Like Bollinger Bands, this new version used a volatility based indicator, Average True Range ATRto set channel width. There are three steps to calculating Keltner Channels. First, select the length for the exponential moving average. Second, choose the time periods for bands Average True Range ATR. Third, choose the multiplier for the Average True Range. The example above is based on the default settings for SharpCharts. Because moving averages lag price, donchian longer moving average will have more lag and a shorter moving average will have less lag. ATR is the basic volatility setting. Short timeframes, such as 10, produce a more volatile ATR that fluctuates as period volatility ebbs and flows. Longer timeframes, such asmooth these fluctuations to produce a more constant ATR reading. The multiplier has the most affect on the channel width. Simply changing from 2 to 1 will cut channel width in half. Here's a chart showing three Keltner Channels set at 1, 2, and 3 ATRs away from the central moving average. This particular technique has been advocated by Kerry Lovvorn of SpikeTrade. The chart above shows the default Keltner Channels in red, a wider channel in blue and a narrower channel in green. The blue channels were set three Average True Range values above and below 3 x ATR. The bollinger channels used one ATR value. All three share the day EMA, which is the dotted line in the middle. The indicator windows show differences in the Average True Range ATR for 10 periods, 50 periods and periods. Notice how the short ATR 10 is more volatile and has the widest range. In contrast, period ATR is much smoother with a less volatile range. Indicators based on channels, bands and envelopes are designed to encompass most price action. Therefore, moves above or below the channel lines warrant attention because they are relatively rare. Trends often start channel strong moves in one direction or another. A surge above the upper channel line shows extraordinary strength, while a plunge below the lower channel line shows extraordinary weakness. Such strong moves can signal the end of one trend and the beginning of another. With an exponential moving average as its foundation, Keltner Channels are a trend following indicator. As with moving averages and trend following indicators, Keltner Channels lag price action. The direction of the moving average dictates the direction donchian the channel. In general, a downtrend donchian present when the channel moves lower, while an uptrend exists when the channel moves higher. The trend is flat when the channel moves sideways. A channel upturn and break above the upper trendline can signal the start of an uptrend. A channel downturn and break below the lower trendline can signal the start a downtrend. Sometimes a strong trend does not take hold after a channel breakout and prices oscillate between the channel lines. Such trading ranges are marked by a relatively flat moving average. The channel boundaries can then be used to identify overbought and oversold levels for trading purposes. There are two differences between Keltner Channels and Bollinger Bands. First, Keltner Channels are smoother than Bollinger Bands because the width of the Bollinger Bands is based on the standard deviation, which is more volatile than the Average True Range ATR. Many consider this a plus because it creates a more constant width. This makes Keltner Channels well suited for trend following and trend identification. Second, Keltner Channels also use an exponential moving average, which is more sensitive than the simple moving average used in Bollinger Bands. The chart below shows Keltner Channels blueBollinger Bands pinkAverage True Range 10Standard Deviation 10 and Standard Deviation 20 for comparison. Notice how channel Keltner Channels are smoother than the Bollinger Bands. Also notice how the Standard Deviation covers a larger range channel the Average True Range ATR. The chart below shows Archer Daniels Midland ADM starting an uptrend as the Keltner Channels turn up and the stock surges above the upper channel line. ADM was in a clear downtrend in Bollinger as prices continued to pierce the lower channel. With a strong thrust up in June, prices bands the upper channel and the channel turned up to start a new uptrend. Notice that prices held above the lower channel on dips in early and late July. Even with bollinger new uptrend established, it is bands prudent to wait for a pullback or better entry point to improve the reward-to-risk ratio. Momentum oscillators or other indicators can then be employed to define oversold readings. This chart shows StochRSIone of the more sensitive momentum oscillators, dipping below. The subsequent crosses back above. The second chart shows Nvidia NVDA starting a downtrend with a sharp decline below the lower channel line. After this initial break, the stock met resistance near the day EMA middle line from mid May until early August. The inability to even come close to the upper channel line showed strong downside pressure. A period Commodity Channel Index CCI is shown as the momentum oscillator to identify short-term overbought conditions. A move above is considered overbought. A subsequent move back below signals a resumption of the downtrend. This signal worked well until September. These failed signals indicated a possible trend change that was subsequently confirmed with a break above the upper channel line. Once a trading range or flat trading environment has been identified, traders can use the Keltner Channels to identify overbought and oversold levels. A trading range can be identified with a flat moving average and the Average Directional Index ADX. The chart below shows IBM fluctuating between support in the area and resistance in the area from February to late September. The day EMA, middle line, lagged channel action, but flattened out from April to September. The indicator window shows ADX black line confirming a weak trend. Low and falling ADX shows a weak trend. High and rising ADX shows a strong trend. ADX was below 40 the entire time and below 30 most of the time. This reflects the absence of trend. Also, notice that ADX peaked in early June and fell until late August. Armed with the prospects of a weak trend and trading range, traders can use Keltner Channels to anticipate reversals. In addition, notice that the channel lines often coincide with chart support and resistance. IBM dipped below the lower channel line three times from late May until late August. These dips provided low-risk entry points. The stock did not manage to reach the upper channel line, but did get close as it reversed in the resistance zone. The Disney chart shows a similar situation. Keltner Channels are a bands following indicator designed to identify the underlying trend. Trend identification is more than half the battle. The trend can be up, down or flat. 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 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. Keltner Channels can be found in SharpCharts as a price overlay. As with bollinger moving average, Keltner Channels should be shown on top of a price plot. Upon selecting the indicator from the drop down box, the default setting will appear in the parameters window 20,2. The first number 20 sets the periods for the exponential moving average. The second number 2. The third number 10 is the number of periods for Average True Range ATR. Users can change the parameters to suit their charting needs. Click here for a live example. This scan looks for stocks that broke above their upper Keltner Channel 20 days ago to affirm or establish an uptrend. The current period CCI is below to indicate a short-term oversold condition. This scan looks for stocks that broke below their lower Keltner Channel 20 days ago to affirm or establish a downtrend. For more details on the scan channel to use for Keltner Donchian scans, please see our Scanning Indicator Reference in the Support Center. Keltner Channel by Stuart Evens Nov Market data provided by: Commodity and historical index data provided by: Unless otherwise indicated, all data is delayed by 20 minutes. The information provided by StockCharts. Trading and investing in financial markets involves risk. You are responsible for your own investment decisions. Log In Sign Up Help. Free Charts ChartSchool Blogs Webinars Members. Table of Contents Keltner Channels. Oversold after Bullish Keltner Channel Breakout. Overbought after Bearish Keltner Bollinger Breakout. Trend Trading for a Living Donchian Carr Trend Following Michael Covel. Sign up for our FREE twice-monthly ChartWatchers Newsletter! Blogs Art's Charts ChartWatchers DecisionPoint Don't Ignore This Chart The Canadian Technician The Traders Journal Trading Places. More Resources FAQ Bands Center Webinars The StockCharts Store Members Site Map. Terms of Service Privacy Statement.
Z Keltner Channel SV & Z Bollinger Band SV
Z Keltner Channel SV & Z Bollinger Band SV
4 thoughts on “Donchian channel vs bollinger bands”
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