Technical analyst, Manning Stoller developed the STARC Bands indicator in the early 80s of the last century. The STARC Bands indicator is designed to cover price action analysis (like any other channel indicator) and thus can be used to help determine entry and exit points when the price crosses any of its borders. Starc stands for the “Stoller Average Range Channel”.
What is the STARC Bands indicator?
The STARC Bands channel expands and contracts depending on the market volatility. When calculating the STARC Bands indicator, the average true range is used (ATR is an indicator that measures volatility). This can give more in-depth indicator readings and help to filter potential false signals than the similar Bollinger Bands indicator, which uses close prices and standard deviation to calculate it.
The STARC Bands indicator consists of the middle line which is a simple moving average of the asset’s price and two bands below and above it. The bottom band is calculated by subtracting the value of the average true range (ATR) from the SMA. The top band is established by adding the value of the ATR to the SMA (or by adding multiple values of the ATR to the SMA).
Calculation of the STARC Bands indicator
STARC Bands are built around a simple moving average (SMA) of the underlying asset, so the SMA is considered as the core indicator. The position of each band (boundary) is calculated by adding or subtracting the ATR value to/from the SMA.
Upper Band STARC Bands = SMA + ATR
Bottom Band STARC Bands = SMA – ATR
Keep in mind that the calculation takes ATR, multiplied by a certain factor, which is most often equal to 2. Thus, the full formula looks like this:
Top band STARC Bands = SMA (6) + 2xATR
Lower band STARC Bands = SMA (6) – 2хATR
This is how the STARC Bands indicator looks in the MetaTrader 4 terminal.
How to use the STARC Bands indicator?
As we have said, like any other channel indicator, STARC Bands are designed to cover most of the price action, thereby setting the boundaries of price fluctuations. As a result, any movement that goes beyond the channel are considered either as a false breakout or as a sign that the current trend is gaining strength (depending on whether the market is moving in the lateral range or if there is a trend). Thus, there are two common interpretations of the channel boundary breakout.
- If the market is in the lateral range, a breakout of the STARC Bands channel border could be false. Price stops and follows back to a simple moving average (SMA). For example, if the price goes down and breaks through the lower boundary of the channel, while the market as a whole is in the lateral range, it can be assumed that the price is likely to return to the SMA and can often reach the opposite boundary of the channel. However, it would be better to wait for confirmation in the form of a reversal pattern. In the image below, the price repeatedly tries to break through the upper limit, but returns to the SMA and sometimes reaches the opposite boundary.
- If the market is trending, then the price movement that breaks through any of the STARC Bands is usually considered a sign of the acceleration of the trend. For example, if, during an uptrend, the price accelerates and penetrates beyond the STARC Bands, the price may be less likely to roll back to its original level, especially to the opposite border of the channel. The chances are that the price is consolidating at the higher levels it has just reached. Often, as a sign of strengthening the uptrend, a flag or pennant is formed after a narrow trading range. Of course, sometimes, the price will return to the SMA or partially to the channel. However, in some cases, as the uptrend continues, the SMA will follow higher, and the price will meet it at a higher price level.
STARC Bands trading strategy
These bands will contract and expand depending on the fluctuations of the average true range (ATR). The difference between Bolliner and STARC is that STARC bands are used to determine the high probability trade rather than standard deviations of price action. Simply when price rises to the upper band a sell opportunity is indicated and when the price reaches the lower band a buy opportunity is indicated.
A simple STARC Bands trading strategy is discussed as follows:
STARC Bands buy strategy
- You can buy an asset if the price moves beyond the middle band (SMA).
- You can place the stop-loss below the local low. You can shift the stop-loss to the lower band as the price moves in your favor.
- You can exit when the price moves back below the middle band.
STARC Bands sell strategy
- You can sell an asset if the price moves below the middle band (SMA).
- You can place the stop-loss above the local high. You can shift the stop-loss to the upper band as the price moves in your favor.
- You can exit when the price moves back above the middle band.
STARC Bands Conclusion
The STARC (Stoller Average Range Channels) Bands indicator calculates upper and lower bands around a simple moving average to predict price movement. A price move toward the upper band may mean a pull back towards the moving average, and a move to the lower band may mean a move up towards the moving average.
STARC Bands resemble Bollinger bands but are is a little different as it implies SMA and Average True Range indicator to enhance the accuracy. The STARC Bands indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
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