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As someone who’s just starting with the world of trading, newbies are often confused about two similar trading indicators: the Bollinger Bands and the Keltner Channel. They have multiple similarities and few differences. While Bollinger Bands’ channels are created by using the Standard Deviation of the underlying asset, the Keltner Channels uses the Average True Range.

The two’s differences and similarities are going to be briefly discussed here, but would not be the focus. The focus would be to teach you how to know which of the two to use on different situations. For introductions on Bollinger Bands, I suggest that you read this article, and for Keltner Channel this article.

For the following examples, Keltner Channels and Bollinger Bands are configured with their default settings found in most trading platforms, which is 20 periods.

Example 1 – Gauging Trends

This example is of GOOGL’s daily chart with both the Keltner Channel settings of 20, 1 and the Bollinger Bands in its own default settings. Immediately the difference to their channels is evident. Keltner is much tighter than Bollinger.

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Keltner Channel (Chart From TradingView)

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Bollinger Bands (Chart From TradingView)

Based on these charts, Keltner is much better at gauging trends. By looking, one could clearly see when a trend ends. If you look closely as the Keltner chart, there are three green candles completely outside what is called envelopes, followed by one red. Once the second red candle closed below the low of the previous one and inside the envelopes, GOOGL was done.

Looking at the Bollinger chart, this part of the trade was unclear, and as a day trader it is important for you to know exactly when a stock is breaking down so you could get off it or exactly when it is going up so you could jump into it as soon as possible and for as long as you can.

Example 2 – Morning Reversal

This second example features morning reversal, which is a great trading setup for the first hour of trading, preferably within the first 20 to 30 minutes of trading. This happens when a market maker manipulates the stock prices on the open, a reversal can occur under the right circumstances.

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Keltner Channel (Chart From TradingView)

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Bollinger Bands (Chart From TradingView)

GOOGL experienced a high volume gap up on mid-October 2014. Looking at the Keltner Channel, the candlesticks were well beyond the upper channel and outside the envelopes. During these phenomena in trading, how would you know if it’s time to short or exit your long position?

This is where the Bollinger Bands could help you. According to its chart, once the stock came inside of the bands, you know things are not going to be good. Since Bollinger is based on standard deviations, the crazier the action, the wider the bands would expand, which would clearly display the breakdown if the stocks start to give up.

This advantage of Bollinger Bands also applies to choppy markets like forex, where prices are very noisy. Bollinger’s standard deviations filters out the noise within a range bound market.

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