Standard Error Bands measure trend direction and price volatility, helping commodity traders spot overextended moves, likely reversals, and potential breakout opportunities.
Learn what the Standard Error Band (SEB) shows as a technical analysis tool and how traders use it in creating and applying trading strategies.
We begin by explaining the components of the SEB, what these components show, and the various interpretations and use cases of SEBs.
Who Invented Standard Error Bands?
Standard error bands were invented as a technical analysis tool by Jon Anderson, primarily to be used as a trend indicator. The technique was released as the 14th volume piece of a multi-volume series in 1996.
What Are The Components Of Standard Error Bands?
Standard Error Bands (SEBs) can show trend direction and price volatility around the trend.
There are three components to Standard Error Bands:
- Smoothed Linear Regression Line: Generally a 21-period linear regression curve that is smoothed by a 3-period simple moving average
- Upper Standard Error Band: The linear regression line plus 2 standard errors.
- Lower Standard Error Band: The linear regression line minus 2 standard errors.
Potential Intepretations of Standard Error Bands
The interpretation depends on whether the band is contracting or expanding.
- Contracting SEB: When the price is trending and the Standard Error Bands are contracting, then the price has strength and may continue to trend.
- Expanding SEB: When the Standard Error Bands begin to expand, then the trend may be ending and a trader might expect the markets either to consolidate into a non-trending market or reverse the trend.
What Else Is The Standard Error Band Used For?
Standard Error Bands are used by some traders to determine the strength of trend and potential reversals of trend or consolidation of prices.
Standard Error Bands are quite unique in their interpretation, but there are other price-band concepts that are popular such as Bollinger Bands, Keltner Channels, and Moving Average Envelopes.
Further Reading on Volatility Indicators
These volatility tools complement Standard Error Bands: Mass Index, Swing Index, and VIX & VXN Indexes.
Update history
This page was revised 1 time in April 2022.
Added "traders" to clarify which audience benefits from charting and analysis tools.
The Commodity Briefing
The stories behind the prices. Surprising, useful, occasionally weird - in your inbox every weekday.
- Price moves
- Supply shocks
- Macro drivers
Before you go
Get The Commodity Briefing - free, 2 minutes.