Standard deviation bands anchored to the session open

[Fairman]

Standard deviation bands anchored to the session open

Bollinger bands use a rolling window. Anchored bands do something different. You pick a starting point, usually the session open, and calculate the average and standard deviation of price from that point forward. The bands widen as the session develops and its range grows.

The anchored version answers a specific question. How far is price from the session's average, measured in the session's own volatility?

At the start of the session the bands are tight because there's little data. As the session goes on they settle into a shape that reflects what's actually happened since the open. A move to the second deviation band late in the session means price is stretched relative to everything the session has done so far.

For mean reversion scalpers this is a useful reference. Fading moves at the outer band works better on rotational days, when the session keeps returning to its average. On trend days price can walk along the outer band for hours, and fading it is a poor idea.

The way to tell the difference is to watch how often price crosses back through the average. If it's crossed several times, the session is rotating. If it hasn't crossed since the first hour, it's trending.

Most platforms let you anchor a VWAP with deviation bands. A price only version without volume weighting works too and behaves similarly on FX.

[FXS London Scalper]

Anchoring to the session open is a good way to keep the bands honest about the session you are trading. Which open matters too. Anchoring at 07:00 London picks up Frankfurt, while 08:00 starts clean with London, and on days when Frankfurt moved a lot the two versions sit quite far apart for the first hour. Worth noting as well that the bands are almost useless for the first fifteen to twenty minutes, since a handful of bars gives a standard deviation that swings wildly. Treating the second deviation band as meaningful only after 08:30 avoids reading too much into the early prints.

[Fairman]

Choosing the anchor point matters more than the band settings. Anchoring to the London open gives bands that describe London's behaviour. Anchoring to midnight gives bands that include Asia. Anchoring to the New York open gives a fresh set for the US session. Each answers a slightly different question, and they can point in different directions at the same moment. Picking one anchor that matches the session you actually trade, and sticking with it, keeps the reading consistent. Mixing anchors depending on what looks best on a given day is a quick way to make the tool tell you whatever you already wanted to hear.

[Fairman]

The first hour is the weak point. With only a few bars since the anchor, the standard deviation is small and unstable, so the bands can be very close to price and get touched constantly. Most traders ignore the bands until there's at least an hour of data behind them. Some use the previous session's final band width as a placeholder until the new session's bands have settled, which gives a rough reference during the opening hour without relying on a calculation that doesn't have enough data to mean much yet. Watching how wide the bands are at the end of each session for a couple of weeks gives a reasonable placeholder figure.

[Fairman]

News during the session can stretch the bands permanently for the rest of that session. A single large release move adds a lot of variance, and because the bands are anchored, that variance stays in the calculation until the next anchor. After a big release, the bands might be so wide that price never reaches them again that day. In that case some traders re-anchor from the release bar, effectively starting a new session from the news, which gives bands that reflect the post news market rather than a mix of before and after. Re-anchoring needs to be a rule rather than a choice made on the day, otherwise it becomes another way to make the bands say what you want. Something like re-anchor after any tier one release, every time, keeps it consistent.

[Fairman]

Combining the bands with yesterday's levels can help filter fade trades. A touch of the outer band that also lines up with yesterday's high or low has two separate reasons to hold. A touch of the outer band in open space has only one, the statistical stretch. Many traders only take fades at the outer band when there's another reference nearby, which cuts the number of trades but tends to improve the ones that remain. It's also a way of making sure you're not fading a genuine breakout simply because a calculation says price is far from average. A note in the journal of whether each fade had a second reference behind it makes the effect easy to measure later.

[FXS Prop Desk]

Anchored bands are a good fit for scalping because they answer a session-specific question. One practical detail: in the first half hour after the anchor, the bands are calculated from very few bars and can be extremely narrow or jumpy. It is worth waiting until a minimum number of bars has formed before treating the bands as meaningful. After that, a touch of the second band from the session average is a much more stable signal than the same touch in the first minutes.