Understanding Standard Error Bands To Track Trend & Price Volatility

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Standard Error Bands can show trend direction and price volatility around the trend.

There are three components to Standard Error Bands:

  1. Smoothed Linear Regression Line: Generally a 21-period linear regression curve that is smoothed by a 3-period simple moving average
  2. Upper Standard Error Band: The linear regression line plus 2 standard errors.
  3. Lower Standard Error Band: The linear regression line minus 2 standard errors.

Standard Error Bands are plotted on the chart of Wal-Mart (WMT) stock below:

 
Standard Error Bands show volatility around price

 

Potential Intepretations of Standard Error Bands

  • When price is trending and the Standard Error Bands are contracting, then the price has strength and may continue to trend.
  • 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 trend.

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 (see: Bollinger Bands), Keltner Channels (see: Keltner Channels), and Moving Average Envelopes (see: Moving Average Envelopes).

How to Start Trading

If you are interested in trading using technical analysis, have a look at our reviews of these regulated brokers available in to learn which charting & analysis tools they offer:

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.0%-89.0% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Further Reading

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.

Also see our guides on Forex, Crypto and Option brokers to find out which tools brokerages offer their clients.

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