What's the difference between Bollinger Bands® and Keltner Channels?

By Casey Murphy | Updated July 30, 2014 AAA
A:

In technical analysis, there is a small difference between Keltner Channels and Bollinger Bands®. Before examining the differences it is important to understand that these indicators are both used to gauge volatility. Buy and sell signals are generated by each indicator when the price of the underlying asset surpasses the upper or lower channel and crosses back above or below the key channel level. For bulls, a move below the lower channel signals oversold conditions, and buy signals are generated when the price rises back above the lower channel. For the bears, sell signals are generated when the price move above the upper band and then closes back below.

Taking a look at Bollinger Bands®, the channels are created by using the Standard Deviation of the underlying asset while Keltner channels use the Average True Range. It is important to note, that aside from how the channels are created, the interpretation of these levels are generally the same.

Bollinger Bands®

Taking a look at the chart of Starbucks Corp. (SBUX), you’ll see that buy and sell signals are generated at the blue and red arrows respectively. (For more on this topic, check out Using Bollinger Band® "Bands" To Gauge Trends)

Keltner Channel

If you look closely, the chart of Starbucks (SBUX) with Keltner Channels as an overlay instead of Bollinger Bands®, you’ll see that they look similar, but because of the difference in how the band is calculated the decision points fall at slightly different levels. (For more, check out Capture Profits Using Bands And Channels)

Since Keltner Channels use average true range rather than standard deviation, it is generally more common to see more buy and sell signals generated in Keltner Channels than when using Bollinger Bands®. For instance, some traders would have consider three sell signals using Bollinger Bands® vs four sell signals using Keltner Channels. In practice, Bollinger Bands® are more popular among active traders because of the statistical significance of using standard deviation compared to the average true range.

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