Online Trading Concepts

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Standard Error Bands

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

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).

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