What Is Standard Error?
Standard Error is a linear regression-based indicator for trend trading. Trend trading is an effective crypto trading strategy that allows traders to capitalize on the current market trend. This indicator is for advanced traders who understand how volatility affects price action and conduct advanced technical analysis.
The Standard Error (SE) and Standard Error Bands (SEB) are two separate indicators, but they rely on linear regression to measure deviation. Linear regression is an equation used to measure predictability. The linear regression line measures the current trend. The Standard Error indicator measures how far we’ve deviated from the linear regression line – i.e. the current predictable trend.
The Standard Error indicator is a simple momentum oscillator that has a base value of zero and can oscillate up to +10,000. The Standard Error Bands are channel-style bands that surround the Bitcoin (BTC) candles and indicate volatile and trending markets based on their expansion. Both indicators are recommended for traders who want to keep their finger on the market pulse.
- A consistent uptrend or downtrend indicates a trending market because the price is headed in one direction.
- Linear regression is a mathematical equation that measures trends based on historic patterns. The deviation from the linear regression means increased volatility and risk.
- The two indicators that measure how far the Bitcoin price deviates from the linear regression line are Standard Error and Standard Error Bands. These are two unique indicators.
- The Standard Error indicators show how much the Bitcoin price has deviated from the linear regression line. If the trend is stable, traders can continue their open trades with minimal risk.
- The Standard Error (SE) is an oscillator that goes up and down in positive and negative territory. If the value is going up, this means the trend is deviating from the linear regression line with high volatility.
- Standard Error Bands (SRB) are envelope-style bands that surround the Bitcoin candles and indicate volatility. If the bands shrink, this indicates a trending market and if they expand it indicates a volatile market. The bands have a middle line that oscillates based on the current trend.
- The difference between Standard Deviation vs Standard Error is that Standard Deviation is based on the deviation from the moving average (MA) and not the linear regression.
- The SRB indicator is similar to Bollinger Bands and Keltner Channels because it envelops the price candles. However, Standard Error is based on linear regression and Bollinger Bands is based on theactual moving average.
- The Standard Error and Standard Error Bands can be used in conjunction to predict the volatility of current crypto trends. They are available on all Phemex market pairs.
Standard Error & Standard Error Bands
The Standard Error (SE) and Standard Error Bands (SEB) are two unique indicators, but they’re both based on the deviation from the linear regression line. Deviation from the regression line indicates volatility. The extent of the volatility dictates if we’re in a trending market. If we have a trending market and Bitcoin is appreciating, we can open a long trade and make a profit easily. If the market is volatile, it’s more difficult to predict the future direction.
Top: Standard Error Bands. Bottom: Standard Error Oscillator.
The Standard Error Bands are embedded in the chart and they shrink or enlarge based on the state of the volatility. If the Standard Error Bands are shrinking over the candles, this indicates low volatility. The Standard Error is an oscillator-type indicator that moves beneath the chart. If the Standard Error oscillator line is going down, this indicates low volatility and if it’s going up it means high volatility.
Who Invented Standard Error Indicators?
Standard Error Bands were invented by Jon Anderson, an American trader and mathematician. Anderson first introduced the bands in the “Stock and Commodities” magazine in 1996 along with the Standard Error oscillator.
The inventor of the Standard Error indicator advised traders to count on the continuation of the trend if the bands are close to each other, and to expect volatility if they separate out. The indicator was used for stocks and commodities, and later adopted for the crypto markets.
Standard Error Formula
The Standard Error equation is based on a square of the linear regression line and the price average. The oscillator and the bands have different formulas. Here is how to calculate the Standard Error:
The Standard Error bands are based on a smoothened regression line and four standard errors – two for each regression band. The upper regression line is based on a 21-period regression curve. The line uses smoothening with a Simple Moving Average (SMA) combined with two standard errors.
The lower regression line uses linear regression minus two standard errors. The Standard Error Bands formula is the following:
Both formulas are highly nuanced and complex, but the indicator values are automatically calculated on Phemex trading pairs.
How To Use Standard Error Indicators on Phemex?
Type “Standard Error” in the search bar and the two indicators should appear. You can left-click on both and activate them simultaneously:
If the chart has both the Standard Error and the Standard Error Bands activated it will look like this:
The values on the SE indicator will vary based on the chart. In the 1D (daily) chart example above, we see it oscillates from 0 up to 4000. If we change it to the hourly chart, it will oscillate up to 500 and the SE bands will change too:
The indicator takes measurements over a much smaller period of time and deviation is less severe. The default measure is based off the deviation from the 21-period and the 3-period calculation. If a trader wants to change it to “Weighted” or “Exponential” smoothening, they can head to settings:
The exponential and weighted measurements will add more emphasis on the recent data and ignore all historical data. The simple measurement does not ignore historical data and it is the default moving average used for the deviation.
How To Trade With Standard Error Indicators?
An effective trading strategy with the Standard Error is to let the bands tighten around the price candles and open a trade. If the bands are narrow, this indicates a strong trend and a trader can bet in that direction. This image shows a 40% move on Bitcoin over 21 days:
Wide bands indicate high volatility, and narrow bands indicate low volatility.
The price of Bitcoin moved in one direction for nearly three weeks before a reversal. During this period, the bands narrowed significantly. A trend trader could identify the narrowing of the bands and open a long trade on Bitcoin to generate a profit.
How to use the Standard Error Bands to place buy and sell orders?
Traders can use the bands to place buy and sell orders once the Bitcoin price reaches the lower thresholds of the SE bands or surpasses the upper threshold.
- Buy Signal: If the Bitcoin candles fall below the lower barriers of the SEB bands, this is a long opportunity.
- Sell Signal: If the Bitcoin candles rise above the upper barriers of the SEB bands, this is a short opportunity.
This trading technique can be applied on short-term charts such as the 4H (hourly) chart:
Buy when the candles drop below the band limits and vice versa.
Using the default settings on the SEB bands, we can buy and sell when the candles completely leave the bands. If they fall below the band limits, we should open a long order. If they rise above the bands, we should open a short order. While this is not 100% reliable, we can see the bands have been accurate in most cases above.
Are Standard Error Bands Better Than Bollinger Bands?
Standard Error Bands and Bollinger Bands (BB) appear nearly identical visually but their calculations are different. SEB measures the volatility of the trend using a linear mathematical equation, while BB uses an moving average as the base measure. Both indicators can provide valuable insights:
Bollinger Bands (blue) and Standard Error Bands (green) on the Bitcoin chart.
The Bollinger Bands have a higher range as to the expected price of Bitcoin – it could drop lower or go higher in the short-term according to Bollinger Bands. Bollinger Bands tighten based on support/resistance levels while Standard Error Bands tighten based on volatility.
Are Standard Error Bands Better Than Keltner Channels?
Keltner Channels (KC) are an alternative indicator to Bollinger Bands, and they may resemble Standard Error Bands because they are channel-style bands too. The difference is the same as with Bollinger Bands – Keltner Channels measure the average price and not the volatility and the deviation from the regression line:
Keltner Channels (blue) and Standard Error Bands (green).
Standard Error Bands are generally faster compared to Bollinger Bands and Keltner Channels when it comes to adjusting bands and sending signals. The speed can increase accuracy for traders who rely on the bands for buy and sell signals.
The Standard Error Bands and Standard Error oscillator are used by traders who need an alternative to moving average (MA) calculated indicators such as Bollinger Bands. Standard Error indicators use a real mathematical average for price trend based on linear regression which is very helpful for trend trading.
The SE oscillator is used to verify if there is regression from the linear price trend, and the SE bands are used to generate buy and sell signals. Traders can use the bands to verify we’re in a trending market when they tighten around the price candles and make profitable trades.