The Starc bands were developed in the mid-1980’s by the late Manning Stoller. 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. It 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)
If your software does not have the Starc bands, or if you can’t find it online, it can be created in a spreadsheet, and this link may help you with the ATR calculation. Starc bands are available on many forex trading platforms as well.
Some internet postings claim that Starc bands are similar to Bollinger bands, but this is not the case. The beauty of the Starc bands is that they are one of the few indictors than can give you an objective reading on whether it is a high- or low-risk time to buy or sell.
Using two times the Average True Range (ATR), Manning estimated that 90% of the price activity should stay within the bands. His research also determined that by using three times the ATR, close to 100% 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.
Regular readers of my analysis know that I frequently refer to the Starc bands. In this May 20 column, I noted that two of my favorite sectors, the Select Sector SPDR - Consumer Staples (XLP) and the Select Sector SPDR - Health Care (XLV) were reaching their weekly Starc+ bands and concluded that it was a high-risk time to buy. Both ETFs made their highs that week and have since traded lower.
The May-through-September trading in SLV is a good example of how the Starc bands can be helpful tools and also illustrates some of the differences between these two indicators.
In early May, SLV closed below the Starc- bands (point 1), but instead of a continuation signal, it identified that this was a high-risk time to sell. Five days later, SLV had rallied $2.60 and formed a doji above the Starc+ band. By looking at the Starc bands, as well as the doji (a sign of indecision), traders might have avoided jumping in on the long side at that time.
Short-term doji trading rules would have you selling on a break of the doji lows ($19.11) with a stop above the day’s highs ($19.44). In hindsight, this would have worked quite well, as seven days later, SLV hit a low of $17.05 and was back to the Starc- band (point 3).
The Starc bands identified several additional range trade opportunities throughout the summer (points 4, 5, 6, and 7), as the upper and lower Starc bands were tested.
These bands are also helpful in trending markets, though SLV is not the best example. In late August, SLV tested the Starc+ bands on three consecutive days (circle a), and while there was not much of a pullback, the ranges in SLV did narrow, allowing for the use of a tighter stop.
On September 16, there was another example, as SLV closed at $20.35, which was not far below the Starc+ band at $20.46. Over the following three days, SLV got as low as $20.06 before resuming its uptrend.
NEXT: Recent Examples in Apple and Netflix