For short-term traders, the entry price is even more important because generally, tight stops are used and a common problem is either buying too high or selling too low. Therefore, I wanted to include this hourly chart of the cash EUR/USD to give you an idea of how the Starc bands work on a shorter time frame.
On October 28, 2010, the euro tested the Starc+ band, point 1, and then moved sideways for eight hours before making a brief, marginal new high (by six pips) before reversing to the downside. Clearly, too tight a stop above the prior high would not have worked.
One method that Stoller used was to also plot a second version of the Starc bands that used three times the ATR instead of two times. In this instance (point 1), the wider (3 x ATR) Starc+ band was at 1.3970 versus 1.3940 on the regular (2 x ATR) plot, so a 30-pip stop could be justified and would not have been hit. By the next day, the euro had dropped to the Starc- band at 1.3810.
On November 1, the Starc+ band was again reached. I want to emphasize that similar bar or chart formations are observed regardless of whether you are using weekly or five-minute data. A good example of this developed between November 2 and 3 (see box), as after the second touch of the Starc+ band, the euro moved sideways for 16 hours before resuming its uptrend, point 4. After peaking two days after the election, point 5, the euro started to trend lower, but each time the Starc- band was tested, prices stabilized or moved a bit higher for a few bars before the decline resumed.
Since the formula for the Starc bands is quite straightforward, it is not difficult to add it to most charting packages. I use these bands in both my investing and trading, and I even run it on the mutual funds in my 401(k). I also use the bands to help determine a limit price to enter or exit a position. Like with any good indicator, I suggest that you work with it first, study it on several markets, and convince yourself that it can help you before using it on a real-time basis.
Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own. Readers can post questions or feedback in the comments area below or send to TomAspray@MoneyShow.com.