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Standard
Error Bands
Description
Standard
Error Bands are a type of Envelope
developed by Jon Andersen.
They are similar to Bollinger
Bands in appearance, but they are calculated
and interpreted quite differently.
Where Bollinger Bands are plotted at standard
deviation levels above and below a moving
average, Standard Error Bands are plotted at
standard error levels above and below a linear
regression plot.
Click
here for a definition of standard
error.
For
information on other channel-based line studies,
see Envelopes,
Raff Regression Channels, Standard
Deviation Channels, and Standard
Error Channels.
Interpretation
When
displaying Standard Error Bands, you are prompted
to enter the number of periods in the bands and
the number of standard errors between the bands
and the linear regression line. Mr. Andersen
recommends default values of "21" for
the number of periods, a 3-day simple moving
average for the smoothing, and "2"
standard errors. He
also notes that very short time frames tend to
produce unreliable results.
MetaStock
Pro plots Standard Error Bands on the
security's prices or indicator.
These interpretational comments refer to
bands on the security's closing price.
Because
the spacing between Standard Error Bands is based
on the standard error of the security, the bands
widen when the volatility around the current trend
increases, and contract when volatility around the
current trend decreases.
Since
Standard Error Bands are statistically based,
other statistical indicators such as r-squared,
Standard Error, Linear Regression, etc. work well
for trade confirmation.
Mr.
Andersen notes the following characteristics of
Standard Error Bands.
- Tight bands are
an indication of a strong trend.
- Prices tend to
bounce between the bands when the bands are
wide.
- Tight bands
followed by a widening of the bands may
indicate the exhaustion of a trend and a
possible reversal.
- When the bands
reverse direction after an exhausted trend,
prices tend to move in the direction of the
bands.
- The
r-squared indicator works well in
combination with Standard Error Bands.
A high r-squared value combined with
tight bands confirms a strong trend.
A low r-squared value combined with
wide bands confirms that prices are
consolidating.
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