STARC Bands

Developed by Manning Stoller, the Stoller Average Range Channels are an indicator designed to encompass most price action, like any other banding indicator, and thus pinpoint higher-probability entry points when the price crosses any of its boundaries. The channel expands and contracts in accordance with changes in the Average True Range, the indicator’s measure of volatility.

The so-called STARC Bands are plotted around a simple moving average of the underlying asset’s price, with the SMA forming their core. Each boundary’s position is then calculated by adding or subtracting the value of the ATR to or from the SMA. Here are the formulae:

Upper STARC band = SMA + ATR
Lower STARC band = SMA – ATR

Keep in mind, however, that before the calculation is executed, ATR is multiplied by a user-specified multiplier, most often 2. Commonly, the Simple Moving Average is calculated over six periods. Thus, in general, the more comprehensive formula (don’t forget the variables are situational) is as follows:

Upper STARC band = 6-period SMA + ATR*2
Lower STARC band = 6-period SMA – ATR*2

Here is what the indicator looks like when plotted in a trading platform.

Chart source: VT Trader

Interpretation and trading

As we said, like any other banding indicator, the STARC Bands are designed to encompass most price action, thereby setting boundaries for ‘normal’ price fluctuations. As a result, any moves that spike out of the STARC channel are considered either excessive or a sign that the current trend is gaining strength (depending on whether the market is moving sideways or trending). Thus, there are two ways to interpret a boundary break, each offering a low-risk, high-probability trade.

If the market is range-bound, breaks outside the STARC channel are generally expected to stall and eventually retrace to the Simple Moving Average. For example, if the price is declining and breaks through the lower boundary while the market as a whole is trading sideways, a reasonable assumption is that the market will soon reverse and head back towards the SMA (and very often even touch the opposite band). However, no pattern is fool-proof, and it is best to wait for confirmation from a reversal bar pattern. If confirmed, the scenario at hand offers a low-risk buying opportunity and a high-risk selling opportunity.

If the market is trending, moves that break either STARC band are commonly regarded as signs of trend acceleration. Thus, if during an uptrend the market accelerates and penetrates the upper STARC band, the price is far less likely to retrace to its initial level or touch the lower boundary line. Instead, it is more likely to consolidate – entering a narrow trading range – at the higher levels it has just reached. Often, as a sign of the uptrend strengthening, this tight range will be followed by further acceleration, and a flag or pennant continuation pattern will form.

Of course, the price will occasionally retrace entirely – or at least partially – to the SMA. However, in most cases, as the uptrend continues, the SMA will have risen, and when the price action pulls back it will meet the SMA at a higher level than before.