Moving averages and volatility bands like Bollinger Bands, Keltner Channels, and Donchian Channels can be used to identify trends and potential buy/sell signals in financial markets. They provide relative definitions of high and low prices that can help compare price action to indicators. Parameters like length of moving averages and bandwidth percentages must be chosen based on the asset and trading objectives. Crossing or moving outside the bands can signal trend continuation or reversals depending on other confirming indicators and market conditions.

1. Moving Averages

2. Moving
Averages
Section I – 39%
Concept of Moving Averages
 Types of Moving Averages
 Length of Moving Averages
 Strategies using Moving Averages
 Concept of Directional Movement
 Envelopes
 Channels
 Bands

3. Concept
of
Channels , Envelope & Bands

4. • Moving Average Envelopes are percentage-based envelopes set above and
below a moving average.
• The moving average, which forms the base for this indicator, can be a simple
or exponential moving average.
• Each envelope is then set the same percentage above or below the moving
average. This creates parallel bands that follow price action.
• Moving Average Envelopes can be used as a trend following indicator.
However, this indicator is not limited to just trend following.
• The envelopes can also be used to identify overbought and oversold levels
when the trend is relatively flat.
Envelope

5. • Calculation for Moving Average Envelopes is straight-forward.
• First, choose a simple moving average or exponential moving average.
• Simple moving averages weight each data point (price) equally.
• Exponential moving averages put more weight on recent prices and have less
lag.
• Second, select the number of time periods for the moving average.
• Third, set the percentage for the envelopes.
• A 20-day moving average with a 2.5% envelope would show the following two
lines
Calculations - Envelope

6. Calculations - Envelope

7. Interpretation - Envelope
• Moving Average Envelopes are a natural trend following indicator. As with
moving averages, the envelopes will 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 strong trend does not take hold after an envelope break and prices move
into a trading range.
• The envelopes can then be used to identify overbought and oversold levels for
trading purposes.
• A move above the upper envelope denotes an overbought situation, while a
move below the lower envelope marks an oversold condition.

8. Parameter - Envelope
• The parameters for the Moving Average
Envelopes depend on your
trading/investing objectives and the
characteristics of the security involved.
• Traders will likely use shorter (faster)
moving averages and relatively tight
envelopes. Investors will likely prefer
longer (slower) moving averages with
wider envelopes.
• A security's volatility will also influence
the parameters. Bollinger Bands and
Keltner Channels have built-in
mechanisms that automatically adjust
to a security's volatility.
• Bollinger Bands use the standard
deviation to set bandwidth.
• Keltner Channels use the Average True
Range (ATR) to set channel width.

9. Trend Identification - Envelope

10. Band Bollinger
• Developed by John Bollinger, Bollinger Bands® are volatility bands
placed above and below a moving average.
• Volatility is based on the standard deviation, which changes as
volatility increases and decreases.
• The bands automatically widen when volatility increases and
narrow when volatility decreases.
• This dynamic nature of Bollinger Bands also means they can be used
on different securities with the standard settings.
• For signals, Bollinger Bands can be used to identify M-Tops and W-
Bottoms or to determine the strength of the trend.

11. Calculations - Band Bollinger

12. Basic Rules - Band Bollinger
1. Bollinger Bands provide a relative definition of high and low
2. That relative definition can be used to compare price action and
indicator action to arrive at rigorous buy and sell decisions.
3. Appropriate indicators can be derived from momentum, volume,
sentiment, open interest, intermarket data, etc.
4. Volatility and trend already have been deployed in the construction
of Bollinger Bands, so their use for confirmation of price action is not
recommended.
5. The indicators used for confirmation should not be directly related
to one another. Two indicators from the same category do not
increase confirmation. Avoid collinearity

13. Basic Rules - Band Bollinger
6. Bollinger Bands can be used to clarify pure price patterns such as M-type tops
and W-type bottoms, momentum shifts, etc.
7. Price can, and does, walk up the upper Bollinger Band and down the lower
Bollinger Band.
8. Closes outside the Bollinger Bands can be continuation signals, not reversal
signals-as is demonstrated by the use of Bollinger Bands in some very successful
volatility-break- out systems.
9. The default parameter of 20 periods for calculating the moving average and
standard deviation and the default parameter of 2 standard deviations for the
Bandwidth are just that, defaults. The actual parameters needed for any given
market or task may be different.
10. The average deployed should not be the best one for crossover signals.
Rather, it should be descriptive of the intermediate-term trend.

14. Basic Rules - Band Bollinger
11. If the average is lengthened, the number of standard deviations needs to be
increased simultaneously-from 2 at 20 periods to 2.1 at 50 periods. Likewise, if the
average is shortened, the number of standard deviations should be reduced-from 2 at
20 periods to 1.9 at 10 periods.
12. Bollinger Bands are based upon a simple moving average. This is because a simple
moving average is used in the standard deviation calculation and we wish to be
logically consistent.
13. Be careful about making statistical assumptions based on the use of the standard
deviation calculation in the construction of the bands. The sample size in most
deployments of Bollinger Bands is too small for statistical significance, and the
distributions involved are rarely normal.
14.Indicators can be normalized with %b, eliminating fixed thresholds in the process.
15. Finally, tags of the bands are just that-tags, not signals. A tag of the upper Bollinger
Band is not in and of itself a sell signal. A tag of the lower Bollinger Band is not in and
of itself a buy signal.

15. Keltner Band
• To construct these bands, first calculate the “Typical Price” (Close + High +
Low) ÷ 3, and calculate a ten-day SMA of the typical price.
• Next, calculate the band size by creating a ten-day SMA of High minus Low or
bar range.
• The upper band is then plotted as the ten-day SMA of the typical price plus
the ten-day SMA of bar range.
• The lower band is plotted as the ten-day SMA to the typical price minus the
ten-day SMA of bar range. (When the calculation is rearranged, it is similar to
the use of an ATR. These bands are sometimes referred to as ATR bands.
• Keltner's original calculation used ten-day moving averages, many analysts
using this method have extended the moving averages to 20 periods. The 20-
period calculation is more in line with the calculation for a Bollinger Band.

16. STARC Band
• STARC is an acronym for Stoller Average Range Channel, invented by Manning
Stoller.
• This system uses the ATR over five periods added to and subtracted from a
five-period SMA of prices.
• It produces a band about prices that widens and shrinks with changes in the
ATR or the volatility of the price.
• Just as with the Keltner Bands, the length of the SMA used with STARC can be
adjusted to different trading or investing time horizons.

17. Donchian channel
• Signals occur with the Donchian channel when
the breaking above or below a high or low over
some past period occurs
• This method does not require the construction
of a trend line; the only requirement is a
record of the highs and lows over some past
period.
• Donchian channel method, the period was four
weeks (20 days), and the rule was to buy when
the price exceeded the highest level over the
past four weeks and sell short when the price
declined below the lowest low over the past
four weeks.
• Such systems are usually “stop and reverse”
systems that are always in the market, either
long or short. As is likely imagined, the channel
systems are more commonly used in the
commodities markets where long and short
positions are effortless and prices tend to
trend much longer.