STRATEGIES

Starc bands stand out among other overbought/oversold indicators for their ability to generate highly reliable signals for traders in all markets and time frames.

As we approach year-end, I often advise traders (and investors also) to use some of their holiday time to review the past year's trades. There are many reasons to do this, and I generally focus more on my losers and those with small gains than I do on big winners.

Once you have your list of trades, there are probably some you can immediately identify that were a bad idea from the start.

Others were likely the result of poor risk/reward analysis whereby a stop was used that was too wide. I am sure there are others for which you will conclude the trade was justified, but the result would have been much different if you had just waited for a better entry point.

Buying too high or selling too low is a problem most of us have, and while there are countless overbought/oversold indicators to help you, the best tool that I have found are the Starc bands.

Starc bands were developed in the mid-1980s by the late Manning Stoller, with whom I had the pleasure of teaching technical analysis in many cities around the world. Starc stands for the "Stoller Average Range Channel," and by far, these are my favorite banding or channel techniques.

The same formula is used on all markets and for any time frame and goes as follows:

  • Starc+ = 6-period moving average + (2 x 15-period Average True Range) (ATR)
  • Starc- = 6-period moving average - (2 x 15-period Average True Range) (ATR)

The Average True Range (ATR) was developed by Welles Wilder and was discussed along with the formula in an earlier trading lesson.

The beauty of the Starc bands is that unlike most indicators or methods, they tell you when it is a high- or low-risk time to buy or sell. Using two times the ATR, Stoller estimated that 90% of the price activity should stay within the bands.

As for interpretation, if prices are near the Starc+ bands, it is a high-risk time to buy and a low-risk time to sell. Conversely, when prices are near the Starc- band, it is a low-risk time to buy and a high-risk time to sell.

NEXT: The Most Memorable Starc Band Signal from 2011