What's the difference between Bollinger Bands® and Keltner Channels?
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.
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)
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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Sideways Indicators Keltner Channels and Bollinger Band.
Introduction to the Squeeze Play.
The Squeeze Play is a volatility setup. It actually begins with an unusual lack of volatility for the market that you are trading. In other words, a market is trading with much less volatility than is usually the case judging by the market's historical data. Key point: The Squeeze Play relies on the premise that stocks and indexes fluctuate between periods of high volatility and low volatility. When periods of low volatility occur, a market should eventually revert back to its normal level of volatility.
A Bollinger Band consists of three lines that are plotted for each day’s close over the course of time. A simple moving average. The simple moving average plus two standard deviations derived from closing prices. The simple moving average minus two standard deviations derived from closing prices. Different parameters in the Bollinger Band can be adjusted such as the period of the simple moving average and the number of standard deviations used. Use parameters that are usually the standard default setting. Bollinger Bands: Length 20, Standard Deviation, 2 Now, the statistical term that you don’t commonly hear in normal conversation is “standard deviation.” Understanding this term is the key to understand how a Bollinger Band detects and displays fluctuations in the degree of volatility. In plain English, standard deviation is determined by how far the current closing price deviates from the mean closing price. The formula for computing standard deviation is rather complex and I’m running the risk of oversimplifying (and offending math Phds) but 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. That is what determines the degree of contraction or expansion of a Bollinger Band.
Before I get on with the discussion, let me state that I’m sure there are many traders who find the Bollinger Bands to be a valuable trading tool by itself. I think that’s fine and I wish them well. I only know that my own personal requirements as a trader from a risk/reward standpoint dictate that I need more information than what I can get from Bollinger Bands alone. As students of Bollinger Bands know, when the bands get "narrow", a breakout is about to occur. But how narrow is narrow? Chart created on Market Warrior, the flagship product of Mikulaforcasting. Chart 1 Note: The blue lines are Bollinger Bands. At point 1 the Red arrows are indicating a Bollinger Band Squeeze. At point 2 the Red arrows are indicating another Bollinger Band Squeeze. What’s hard about this situation is you do not know how to qualify this squeeze. What we need to do is to quantify how narrow is narrow so that you can determine when a potential trade is triggered. The way we do this is to add the Keltner Channel to the chart.
Keltner Channels, which were originally created by Chester Keltner in 1960s and later modified by Linda Raschke, look similar to Bollinger Bands. They consist of a center line with an upper band and a lower band. The big difference between these two indicators is the following: Bollinger Bands: The distance of the outer bands from the center line is based on the movement of the closing price. The more the closing price moves from day-to-day, the more the outer bands expand away from the center line. Keltner Channel: The distance of the outer bands from the center line is based on the range from the high to low on a daily basis. The more the trading range varies, the more the outer bands expand away from the center line. As with Bollinger Bands, the formula for Keltner Channels is rather involved. We could get into it, but I'd rather just convey the general concept. The idea behind Keltner Channels is that the distance between the center lines and outer bands represent the mathematical norm. As such, you would normally expect to see all of the current price action contained within the bands of the Keltner Channel. The traditional use of the Keltner Channel is to look for a trading opportunity when the price action breaks outside of the Keltner Channel. When that happens, it means that an unusual level of momentum is coming into the market and a strong directional move may be underway. But here is the most useful observation from the perspective of the Squeeze Play. Go back and look at the Bollinger Band definition. Remember, the bands are a function of how much the current closing price differs from the average closing price. That's simplifying it a tad, but that is the general idea. Now, the Keltner Channel is based on the range between the high and the low. Let me ask you a question. Which do you think will tend to exhibit more change when the market goes from an abnormally non-volatile state back to normal volatility state? a. The difference between the current close and the average closing price or b. The range between the high and the low Here's my answer: While both values will tend to change, the answer is "a." Closing values will tend to exhibit more change than the trading range. As a result of this the outer bands of the Bollinger Bands will tend to expand and contract faster than the outer bands of the Keltner Channels. Now See chart 2 below Bollinger + Keltner.

Keltner channels and bollinger bands

The Keltner Channel is a popular technical indicator found on most charting software programs. Chester Keltner, who was a grain trader in Chicago, first described the indicator in his 1960 book "How To Make Money in Commodities".
He described the center line of this trend-following indicator as a 10 day simple moving average of 'typical price'. Typical price was calculated adding a price bar's high, low and close and then dividing by three ==> (H + L + C) / 3.
The upper and lower channel lines were drawn a certain distance (+/-) from the center line. The distance was determined by calculating a 10 day simple moving average of price's range (high - low).
So basically, Keltner Channels are a volatility based envelope some what similar to Bollinger Bands, except they use the average true range of price to determine distance from the center line.
The Keltner Channels you'll see in the charts below use a 20 period exponential moving average of typical price and use a multiplier of 1.5 times ATR for the distance of the bands from the center line.
COMPONENTS.
Keltner Channel (setting: 20 - 1.5)
MACD Histogram (setting: 3 - 9 - 15)
KELTNER CHANNEL STRATEGY SIGNALS.
This strategy attempts to use the channel to indicate to the trader when there is sufficient momentum in a stock or ETF (such as QQQQ below) to trade a pullback. Once there is enough momentum to warrant a trade, the MACD Histogram is used to trigger a trade in the direction of the immediate trend.
If you don't know where to place your initial Stop, try getting some ideas from my Stock Day Trading System page.
Areas of price support and resistance generally work well for initial stops. Of course, their disadvantage is that everyone knows where they're at.
Buy Setup: Two consecutive price bars close above channel.
Buy Trigger: MACD Histogram is rising (at bar close)
Short Setup: Two consecutive price bars close below channel.
Short Trigger: MACD Histogram is falling (at bar close)
You have to use some trading sense when using entries like above.
You'll notice on the chart above at around 12:20pm there is another signal to short according to the rules, but price had just made a new high. So, you'd have four options at that point:
1) Take the short as usual.
2) Take the short with a tighter stop.
3) Take the short with a plan to 'stop & reverse' if the stop is hit.
4) Don't take the trade.
In addition to a new high, price had just broken a trendline (not drawn on chart), and the MACD Histogram had a double divergence.
One could make a case for a long entry here instead of a short entry using the histogram for divergence, as in the Divergence Trading Strategy.
You can see from this example, why markets do what they do. Different traders can be looking at the same exact chart and get completely opposite ideas as to what price might do next.

Keltner Channels.
Table of Contents.
Keltner Channels.
Introduction.
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 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. Channels can also be used to identify overbought and oversold levels when the trend is flat.
In his 1960 book, How to Make Money in Commodities, Chester Keltner introduced the “Ten-Day Moving Average Trading Rule,” which is credited as the original version of Keltner Channels. This original version started with a 10-day SMA of the typical price as the centerline. The 10-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 1980s. Like Bollinger Bands, this new version used a volatility based indicator, Average True Range (ATR), to set channel width. StockCharts uses this newer version of Keltner Channels.
Calculation.
There are three steps to calculating Keltner Channels. First, select the length for the exponential moving average. Second, choose the time periods for the 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, a 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 10-period volatility ebbs and flows. Longer timeframes, such a 100, smooth these fluctuations to produce a more constant ATR reading. The multiplier has the most effect on the channel width. Simply changing from 2 to 1 will cut channel width in half. Increasing from 2 to 3 will increase channel width by 50%.
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 for years.
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 green channels used one ATR value. All three share the 20-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 100 periods. Notice how the short ATR (10) is more volatile and has the widest range. In contrast, 100-period ATR is much smoother with a less volatile range.
Interpretation.
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 with 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 of the channel. In general, a downtrend is 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.
Versus Bollinger Bands.
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 (blue), Bollinger Bands (pink), Average True Range (10), Standard Deviation (10) and Standard Deviation (20) for comparison. Notice how the Keltner Channels are smoother than the Bollinger Bands. Also, notice how the Standard Deviation covers a larger range than 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 April-May as prices continued to pierce the lower channel. With a strong thrust up in June, prices exceeded 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 a new uptrend established, it is often 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 StochRSI, one of the more sensitive momentum oscillators, dipping below .20 to become oversold at least three times during the uptrend. The subsequent crosses back above .20 signaled a resumption of the uptrend.
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 20-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 10-period Commodity Channel Index (CCI) is shown as the momentum oscillator to identify short-term overbought conditions. A move above 100 is considered overbought. A subsequent move back below 100 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.
Flat Trend.
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 120-122 area and resistance in the 130-132 area from February to late September. The 20-day EMA, middle line, lagged price 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 a 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.
Conclusions.
Keltner Channels are a trend 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.
Using with SharpCharts.
Keltner Channels can be found in SharpCharts as a price overlay. As with a moving average, Keltner Channels should be shown on top of a price plot. Upon selecting the indicator from the dropdown box, the default setting will appear in the parameters window (20,2.0,10). The first number (20) sets the periods for the exponential moving average. The second number (2.0) is the ATR multiplier. The third number (10) is the number of periods for Average True Range (ATR). These default parameters set the channels 2 ATR values above/below the 20-day EMA. Users can change the parameters to suit their charting needs. Click here for a live example.
Suggested Scans.
Oversold after Bullish Keltner Channel Breakout.
This scan looks for stocks that broke above their upper Keltner Channel 20 days ago to affirm or establish an uptrend. The current 10-period CCI is below -100 to indicate a short-term oversold condition.
Overbought after Bearish Keltner Channel Breakout.
This scan looks for stocks that broke below their lower Keltner Channel 20 days ago to affirm or establish a downtrend. The current 10-period CCI is above +100 to indicate a short-term overbought condition.
For more details on the scan syntax to use for Keltner Channel scans, please see our Scanning Indicator Reference in the Support Center.