The Basics of Bands and Channels

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Capture Profits Using Bands And Channels
by Richard Lee, Investopedia, and various others

Widely known for their ability to incorporate volatility and capture price action, Bollinger bands have been a favorite staple of traders of market traders. However, there are other technical options that traders in the currency markets can apply to capture profitable opportunities in swing action. Lesser-known band indicators such as Donchian channels, Keltner channels and STARC bands are all used to isolate such opportunities. Also used in the futures and options markets, these technical indicators have a lot to offer given the vast liquidity and technical nature of the FX forum. Differing in underlying calculations and interpretations, each study is unique because it highlights different components of the price action. Here we explain how Donchian channels, Keltner channels and STARC bands work.

Donchian Channels
Donchian channels are price channel studies that are available on most charting packages and can be profitably applied by both novice and expert traders. Thes channels have been widely used in many different markets to capture short-term bursts or longer-term trends. Created by Richard Donchian, considered to be the father of successful trend following, the study contains the underlying currency fluctuations and aims to place profitable entries upon the start of a new trend through penetration of either the lower or upper band. The application additionally establishes bands that plot the highest high and lowest low. As a result, the following signals are produced:

A buy, or long, signal is created when the price action breaks through and closes above the upper band.
A sell, or short, signal is created when the price action breaks though and closes below the lower band.
The theory behind the signals may seem a little confusing at first, as most traders assume that a break of the upper or lower boundary signals a reversal, but it is actually quite simple. If the current price action is able to surpass the range's high (provided enough momentum exists), then a new high will be established because an uptrend is ensuing. Conversely, if the price action can crash through the range's low, a new downtrend may be in the works.

Keltner Channels
Another great channel study that is used in multiple markets by all types of traders is the Keltner channel. The application was introduced by Chester W. Keltner (in his book "How To Make Money In Commodities" (1960)) and later modified by famed futures trader Linda B. Raschke. Raschke altered the application to take into account average true range calculation over 10 periods. As a result, the volatility-based technical indicator bears many similarities to Bollinger bands. The difference between the two studies is simply that Keltner's channels represent volatility using the high and low prices, while Bollinger's studies rely on the standard deviation. Nonetheless, the two studies share similar interpretations and tradable signals in the currency markets. Like Bollinger bands, Keltner channel signals are produced when the price action breaks above or below the channel bands. Here, however, as the price action breaks above or below the top and bottom barriers, a continuation is favored over a retracement back to the median or opposite barrier.

If the price action breaks above the band, the trader should consider initiating long positions while liquidating short positions.
If the price action breaks below the band, the trader should consider initiating short positions while exiting long, or buy, positions.

STARC Bands
Also similar to the Bollinger band technical indicator, STARC (or Stoller Average Range Channels) bands are calculated to incorporate market volatility. Developed by Manning Stoller in the 1980s, the bands will contract and expand depending on the fluctuations in the average true range component. The main difference between the two interpretations is that STARC bands help to determine the higher probability trade rather than standard deviations containing the price action. Simply put, the bands will allow the trader to consider higher or lower risk opportunities rather than a return to a median.
Price action that rises to the upper band offers a lower risk sell opportunity and a high risk buy situation.
Price action that declines to the lower band offers a lower risk buy opportunity and a high risk sell situation.
This is not to say that the price action won't go against the newly initiated position; however, STARC bands do act in the trader's favor by displaying the best opportunities. If this indicator is coupled with disciplined money management, a trader will be able to profit by taking on lower risk initiatives and minimizing losses.

Conclusion
Although Bollinger bands are more widely known, Donchian channels, Keltner channels and STARC bands have proven to offer comparably profitable opportunities. By diversifying your knowledge and experience in different band-based indicators, you'll be able to seek a multitude of other opportunities in the market. These lesser-known bands can add to the repertoire of both the novice and the seasoned trader.