Standard Error Bands
Last updated
Last updated
Standard Error Bands (SE Bands) are a volatility-based technical analysis tool that builds upon the linear regression line. Unlike traditional Bollinger Bands, which use standard deviation, SE Bands use the standard error of the regression line to define the distance of the upper and lower bands from the line of best fit. This method provides a more statistically grounded view of price variation, emphasizing how well the price fits the trend.
SE Bands help traders assess not only the volatility of price action but also how consistently the price aligns with the established trend.
The indicator calculates a Linear Regression Line over a given lookback period and then adds/subtracts bands that are a multiple of the standard error of the closing prices from that line.
Linear Regression Line: A straight line that best fits the price data over a specified period.
Standard Error: Measures the average distance that the actual prices deviate from the regression line. A lower standard error means price sticks close to the trend, while a higher error indicates more volatility.
The upper and lower SE bands are drawn above and below the regression line at a fixed multiple (deviations) of the standard error.
Price near the regression line: Indicates price is closely following the trend — stability.
Price touching or breaching SE Bands: Suggests increased volatility or potential reversal.
Bands narrowing: Reduced volatility, often a sign of consolidation.
Bands widening: Increasing volatility, possibly preceding a breakout.
Like Bollinger Bands, the SE Bands can serve as dynamic support and resistance levels.
The two primary parameters in SE Bands are:
Period: Typically set between 20 and 50. Shorter periods are more sensitive to price changes, while longer periods smooth out noise.
Deviations: Commonly set to 2, which means bands are drawn 2 standard errors away from the regression line. Adjusting this can help capture more or fewer price movements depending on your risk tolerance.
Suggested default:
Period = 20
Deviations = 2
If price consistently stays within the SE Bands and hugs the regression line, it's a sign of a strong trend.
Long in uptrend: When price pulls back near the lower SE band and shows signs of bounce.
Short in downtrend: When price touches the upper SE band in a downtrend and rejects.
When price breaks outside the SE Bands but quickly returns, it may signal a false breakout or mean reversion setup.
Widening bands can indicate a trend expansion is coming. Use it alongside momentum indicators like RSI or MACD to confirm setups.
Ignoring the slope of the regression line: The trend direction matters; flat regression lines in sideways markets make signals less reliable.
Overreacting to every band touch: Band touches alone aren’t entry signals. Combine with volume or candlestick confirmation.
Using SE Bands in isolation: For better accuracy, use with supporting tools like trend filters, volume indicators, or support/resistance zones.
Standard Error Bands are a sophisticated tool for traders looking to assess volatility in the context of trend accuracy. They combine regression analysis with statistical variance to create a unique framework that helps filter market noise. Whether you're trend-following or trading mean reversions, SE Bands offer an edge in understanding how price behaves around a statistically significant trend.
