Introduction to the Linear Regression Channel Indicator
Trading profitably is usually a result of having a positive trading probability. So, it would be great if traders would incorporate probabilities and statistics in their trading strategy. The Linear Regression Channel indicator is one of such indicators that is based on the concept of probabilities and statistics.
What is the Linear Regression Channel Indicator?
The Linear Regression Channel is a custom technical indicator which uses statistics as a basis for identifying support and resistance levels, as well as oversold or overbought price levels. It plots two lines, which can be considered as an indicator-based support or resistance level. These two lines form a channel where price typically stays within.
How the Linear Regression Channel Indicator Works?
The goal of the Linear Regression Channel is to plot support and resistance lines in which 68% of price falls within the channel. To do this, some versions would plot a midline which is the linear regression line. This version does not show the midline but it has a formula for the linear regression line embedded within its script, which is also based on statistics. It then plots upper and lower channel lines above and below the linear regression line, which are typically one to two standard deviations from the linear regression line.
How to use the Linear Regression Channel Indicator for MT4
The Linear Regression Channel indicator has two settings which can be modified. It has the “Use Close” option which allows traders to toggle between using the close price or not. It also has the “Bars to Count” variable which allows modifications on how many bars the linear regression line would be based on.
The Linear Regression Line indicator has two lines typically slope in the direction of the trend. As such, traders can use it as a trend direction filter trading only in the direction where the two lines angle towards.
The two lines it plots represent overbought and oversold levels. Price breaching above the upper line can be considered overbought, while price dropping below the lower line can be considered oversold.
As such, the two lines can also be used as support and resistance levels. Price action showing signs of reversal after touching or breaching the two lines can be considered as a mean reversal setup.
Buy Trade Setup
When to Enter?
The Linear Regression Channel lines should slope up. Open a buy order on a bullish reversal candlestick pattern that develops after price has dipped below the lower line of the channel. Set the stop loss below the pattern.
When to Exit?
Close the trade as price touches the upper line of the channel.
Sell Trade Setup
When to Enter?
The Linear Regression Channel lines should slope down. Open a sell order on a bearish reversal candlestick pattern that develops after price has breached above the upper line of the channel. Set the stop loss above the pattern.
When to Exit?
Close the trade as price touches the lower line of the channel.
Conclusion
The Linear Regression Channel indicator is an indicator based on statistics. As such, it can also be a very reliable technical indicator to base a trade setup on. Traders can use it to identify trend direction bias as well as potential trend reversals.
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