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
Here, we use an example chart and explain the ways and how you can interpret 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.
Where Can I Start Trading With SEBs?
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See our other option strategy guides or learn more about technical analysis indicators, concepts, and strategies including Momentum, Elliot Waves, Market Thrust, Moving Averages, and Fibonacci Patterns.