Stoller Average Range Channels (STARC) – Strategy And Rules

As traders, we rely on different analysis tools to gain some insights into what the market might do next; one such tool that is easy to use is the Stoller Average Range Channels (STARC). What do you know about this indicator?

More popularly known as the STARC Bands, the Stoller Average Range Channel is a technical indicator that plots two bands around — one above and one below — a simple moving average (SMA) of an instrument’s price to create a sort of channel around the price action. The upper and lower bands are plotted as an average true range (ATR), or a multiple of it, away from the SMA.

In this post, we will take a look at most of the questions you may have about this indicator: what it is, how it works, and how you can improve your trading strategies with it. Keep reading!

Table of contents:

Key takeaways

  • Stoller Average Range Channel is a technical indicator that plots two bands — one above and one below — a simple moving average (SMA).
  • We show you a backtested Stoller Average Range Channel strategy – complete with trading rules.
  • This article is just one of many articles we have covered about trading indicators.

What is the Stoller Average Range Channel (STARC) in trading?

In trading, the Stoller Average Range Channel is a technical indicator that plots two bands around — one above and one below — a simple moving average (SMA) of an instrument’s price to create a sort of channel around the price action. The upper and lower bands are plotted as an average true range (ATR), or a multiple of it, away from the SMA.

The indicator was created by Manning Stoller and is popularly known as the STARC Bands on many trading platforms. It is similar to Keltner’s channel, but it uses an SMA rather than the EMA used in Keltner’s channel.

As with most channel indicators, the STARC Bands indicator helps to identify overextended price action in one direction so as to anticipate a reversal. But it works best when used in line with the overall trend direction — looking for buying opportunities around the lower bands in an uptrend and selling opportunities around the upper bands in a downtrend.

Stoller Average Range channel trading strategy – trading rules and performance

There are many ways you can calculate the Stoller Average Range channel. We do it our way, and we make the following trading rules:

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If we employ these trading rules on all stocks in the Nasdaq 100 from the year 2000 until today (including all stocks – even those delisted so no survivorship bias), we get the following equity curve:

Stoller Average Range channel trading strategy
Stoller Average Range channel trading strategy

Let’s look at the trading metrics and performance metrics:

  • 1925 trades
  • The average gain per trade is 0.82%
  • The win rate is 65%
  • Average days holding period per trade is 10 days
  • Max drawdown is 29%
  • Profit factor is 1.4

The strategy can highly likely be improved a lot.

The complete code for the strategy is like this (Amibroker):

THIS SECTION IS FOR MEMBERS ONLY. _________________ BECOME A MEBER TO GET ACCESS TO TRADING RULES IN ALL ARTICLES CLICK HERE TO SEE ALL 350 ARTICLES WITH TRADING RULES

How do you calculate the STARC bands in technical analysis?

To calculate the STARC bands in technical analysis, you have to follow these steps:

  1. Choose the periods to use for the moving average — the default is a 6-period SMA, but you can choose what suits your strategy.
  2. Calculate the SMA for the chosen periods.
  3. Calculate the ATR
  4. Choose your ATR multiple — say, 2 ATR
  5. Calculate the upper band — this is done by adding the ATR value to the SMA as follows: Upper Band = n-period SMA + (ATR x Multiplier).
  6. Calculate the lower band — this is done by subtracting the ATR value from the SMA as follows: Lower Band = n-period SMA – (ATR x Multiplier)).

What is the primary purpose of using STARC bands in trading?

The primary purpose of using STARC bands in trading is to observe price volatility and identify when it is overextended from its mean. This can help find trading opportunities because the price tends to reverse to its mean after trading significantly away from it. Also, the price tends to trend in one direction, and this will be reflected in the moving average (middle band) which measures the mean. Essentially, you use the outer bands to find overstretched price action against the trend and trade the reversal in the direction of the trend.

How can STARC bands help identify overbought and oversold conditions?

The STARC can help identify overbought and oversold conditions via its upper and lower bands. When the price rises above the upper band, it is considered an overbought condition, especially when the market is in a downtrend, and periodically rallies to the upper band during pullbacks. In an uptrend, the price rising above the upper band may not necessarily be overbought as the price can keep going higher.

When the price falls below the lower band, it is considered an oversold condition, especially when the market is in an uptrend and periodically falls to the lower band during pullbacks. In a downtrend, the price falling below the lower band may not necessarily be oversold as the price can keep falling lower.

What types of trading assets are suitable for using STARC bands?

The types of trading assets suitable for using the STARC bands are all asset types. The reason is that the STARC bands are calculated from historical price data only, so the indicator can be applied to any asset whose historical price data can be obtained and charted.

The story will be different if STARC is a volume-based indicator, as the historical volume data of certain assets, such as spot forex, cannot be obtained because they are not traded on a central exchange.

What is the typical setting for STARC bands in day trading?

The typical setting for STARC bands in day trading is a 6-period or 5-period moving average with the outer bands set 2ATRs away. But this may not work for every market and in all timeframes.

The best way to know the setting that performs the best for your day trading is to backtest your strategy with different settings. You may find that a longer-period SMA may be better than the default 5-period SMA.

How do STARC bands differ from Bollinger Bands?

The STARC bands differ from Bollinger Bands in that it plots its outer bands some number of ATRs away from the SMA in the middle, while Bollinger Bands plots its outer bands a number of standard deviations away from the SMA in the middle.

However, both are volatility indicators that measure price variations from the mean and both use an SMA to measure the mean. The only difference is in the method of estimating significant price deviations from the mean — STARC uses ATR, while Bollinger Bands uses standard deviation.

What role does the moving average play in STARC bands?

The role the moving average plays in the STARC bands is measuring the price mean, from where significant price deviations can be estimated and plotted as the outer bands.

In other words, the moving average measures the moving price mean, while the outer bands estimate significant price deviations — the upper band estimates significant upside deviations from the mean, while the lower band estimates significant downside deviations from the mean.

How do you interpret the spacing between STARC bands?

To interpret the spacing between STARC bands, you have to understand what it measures. The spacing between STARC bands measures the degree of variation in the price data. In the context of the market, this is referred to as market volatility.

If the band is flat, the bigger the space, the higher the volatility. A smaller space means tight consolidation. When the indicator is sloping in one direction, the space widens in line with the trend.

What does a tightening of STARC bands indicate about market volatility?

A tightening of STARC bands indicates that the market volatility is reducing, but more importantly, it means that the market is consolidating and will eventually break out in either direction, as the price moves into a trending phase.

The market moves from consolidation to a trending phase, and how long the consolidation lasts and how tight it is will determine how far it might go after the price breaks out in the right direction.

Can STARC bands be used for both forex and stock trading?

Yes, the SARC bands can be used for both forex and stock trading since the indicator is calculated from historical price data alone, without input from volume data. And, both markets print price data that can easily be charted and used to plot the STARC bands.

However, if STARC is a volume-based indicator, it wouldn’t be used in spot forex trading, as the historical volume data of the spot forex market cannot be obtained because spot forex is not traded on a central exchange.

What is the best time frame to use with STARC bands?

The best time frame to use with STARC bands will depend on your strategy, trading style, and backtesting results. If you are a day trader, you may want to trade on intraday timeframes like the hourly, 30-minute, or 15-minute time frame.

But if you’re a swing trader, the daily and 4-hourly timeframes may be more suitable. The only way to know the best time frame for whatever trading style and strategy is to backtest the various time frames for that trading style to see the time frame that offers the best performance.

How do STARC bands interact with other indicators like RSI or MACD?

How STARC bands interact with other indicators like RSI or MACD will depend on your trading strategy and what you use the various indicators to achieve in the strategy.

If you are using a mean-reversion strategy, those momentum oscillators can help with your entry and exit when the price crosses the right outer band. For instance, a rising RSI above 30 may be a signal to enter long after the price reverses from below the lower STARC band in an uptrend.

What are the risks of relying solely on STARC bands for trading decisions?

The risks of relying solely on STARC bands for trading decisions are many. Here are some of them:

  • False signals: The STARC bands indicator can give plenty of false signals when the market condition is not suitable for the strategy you’re trading. For instance, a mean-reversion strategy might lead you to go short when the market is only taking a breather and consolidation.
  • Trading against the trend: You can easily go against the trend by trading a mean-reversion strategy with the indicator. For example, you might go short in an up-trending market.
  • Improper entries: Using the indicator alone can lead to jumping the guns and getting stopped out before the move happens.

How can STARC bands be used to set stop-loss orders?

You can use STARC bands to set stop-loss orders by setting them beyond the corresponding outer bands. For instance, if you are long a stock, you can set your stop-loss order below the lower band, and if you’re using a trend-following strategy, that lower band can guide your trailing stop.

Likewise, if you’re short a stock, you can set your stop-loss order above the upper band, and if you’re using a trend-following strategy, that upper band can guide your trailing stop

What does an outward expansion of STARC bands suggest?

An outward expansion of STARC bands suggests a sudden increase in price volatility. This could mean that the price just broke out and exploded in one direction, but it could also be from a non-directional range expansion.

You need to study the price movement to know for sure what is going on in the market. This is why, you shouldn’t trade the indicator but the price movements.

How do market trends affect the effectiveness of STARC bands?

Market trends affect the effectiveness of STARC bands by showing the direction the price is headed. When you know the direction, it is easy to look for trading opportunities in that direction when the price deviates significantly in the opposite direction.

When the market is not trending, or consolidating in a tight range, it wouldn’t make sense to trade — you can only wait for a breakout.

Can STARC bands predict market reversals?

Yes, STARC bands can predict market reversals in certain situations. In a ranging market, the upper and lower bands can serve as the boundaries of the price range and, as such, the price crossing any of the bands might indicate a potential reversal soon.

Also, in a trending market, when the price pulls back beyond the opposite band — the lower band in an uptrend — it could indicate an overextended pullback that could reverse at any moment.

What are the limitations of STARC bands in choppy markets?

The limitations of STARC bands in choppy markets include:

  • The indicator can give a lot of false signals when the market is choppy.
  • It cannot effectively predict a choppy before it happens.
  • It cannot be used alone to form a strategy, as you will need to have a way to predict the choppy market and avoid it or filter it out of the signals.

How do you adjust STARC bands for different market conditions?

To adjust STARC bands for different market conditions, you have to backtest the indicator in the different market conditions to know the settings that work well in those conditions. You may find that the default setting works well in a ranging market but performs poorly in a trending market and a different setting works in a trending market.

What historical data is most useful when using STARC bands?

The most useful historical data when using STARC bands is the price data. The indicator is based only on price data, so that is all you need to calculate the indicator. Both the simple moving average and the ATR, which the indicator is based on, are calculated from price history only.

Can STARC bands be used for scalping strategies in trading?

Yes, STARC bands be used for scalping strategies in trading if used on the right timeframe and with the right strategy. You can set the indicator on the 5-minute and 1-minute timeframes and use it for your scalping strategy. Whether the strategy is mean reversion or breakout, you can use it provided it is backtested and proven to be profitable.

How does the average true range (ATR) factor into STARC bands?

The average true range (ATR) is factored into STARC bands, as it is one of the indicators used in the formulation of the STARC bands. The ATR is used to measure how far away from the SMA the upper and lower bands are plotted. You can set your indicator to plot those bands 2 ATRs away.

What are common mistakes traders make when using STARC bands?

The common mistakes traders make when using the STARC bands include:

  • using it as a standalone strategy to trade mean reversion, which is prone to many false signals
  • not identifying the trend direction to avoid trading against the trend
  • not considering market conditions before looking for trading opportunities
  • not having a risk management plan.

How do STARC bands help in risk management?

STARC bands help in risk management by showing you the level beyond which you can place your stop-loss order. For instance, if you have a long position, you can place your stop-loss order several pips below the lower band, and for a sell trade, you can place the stop-loss order several pips above the upper band.

If you’re using a trend-following strategy, you may choose to trail your profits with a trailing stop-loss order — in a long trade, the trailing SL could follow a few pips below the lower band, while in a short trade, it could a few pips above the upper band.

What advanced techniques can be combined with STARC bands?

Advanced techniques that can be combined with STARC bands include algorithmic trading and portfolio management. The STARC bands indicator can be used to create algorithmic trading by formulating systematic strategies with it and converting the strategies to trading algorithms.

Another advanced technique is portfolio management where the STARC bands can be used to pick assets that are breaking out for trading while scaling out of those that are out of phase.

How does algorithmic trading utilize STARC bands?

Algorithmic trading can utilize STARC bands if strategies created with the indicator are converted to trading algos. The cool thing about algorithmic trading is that it makes backtesting different indicator settings and formulations easy and also makes evaluations and optimization less cumbersome.

Are there any specific sectors or stocks where STARC bands perform best?

There are no specific sectors or stocks where STARC bands perform best. It depends on the market condition at the time you’re using the indicator and the strategy you use. In a sector or stock that is trending nicely, you may use a breakout strategy to trade and then ride the trend to its end.

In sectors or stocks that are ranging, you can use mean-reversion strategies to trade the price swings.

How do traders interpret multiple time frame analysis with STARC bands?

To interpret a multiple time frame analysis with STARC bands, traders have to consider the trend in the various time frames and look to see when the trends align. That is, when the lower time frame trend aligns with the higher timeframe trend.

Alternatively, if the higher timeframe is in a range when the price is making a swing to one direction, they will look for trends in the lower timeframe in that direction.

What further reading or resources would help a beginner understand STARC bands better?

Some of the resources for further reading that would help a beginner understand STARC bands better are trading websites like therobusttrader.com and quantifiedstrategies.com, and trading podcasts like this: “Trader Part 75 – Stoller Average Range Channels Strategies” on Amazon.

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