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The Linear Regression indicator: advantages, characteristics, recommendations
The Linear Regression indicator: advantages, characteristics, recommendations

The MT4 and MT5 terminals always include the Linear Regression indicator by default. It is an efficient and accurate enough technical analysis tool. The indicator was created by Gilbert Ruff back in the nineties of the last century and since then it has been very popular with both professional traders and beginners who are just getting acquainted with the financial market.

The indicator is very simple and straightforward, although it operates according to a rather complex mathematical formula based on regression analysis (hence the name of the tool). However, the trader does not need to understand all the mathematical intricacies: the key is to correctly use the indicator when trading and adequately interpret its signals.

External characteristics

The Linear Regression indicator consists of three parallel lines: the central line is the result of regression analysis, two lateral lines are equally spaced from the central one (the width of the channel depends on the chosen timeframe). According to characteristics of the indicator, it belongs to graphical indicators, which means the trader does not need to enter any variables: the chart is drawn automatically based on the formula. The main advantage of the Linear Regression indicator is that channels can be drawn for any segment on the price chart.

You can use the Linear Regression indicator on any charts and with any oscillators.

With the tool and some channel trading strategy, you can make good enough predictions of the movement of the asset price. Such a behavioral strategy is based on the use of support and resistance levels, so it is very easy to work with. In addition, it guarantees a minimum of noise and more accurate signals.

How does it work?

The linear regression channel is actively used in multiple fields as a statistical tool. The indicator is also relevant in the financial market since it allows you to create clear channels within which you can trade.

In reality, the three indicator lines are:

  

  1. The support line. It is located at the top and shows the maximum average deviation of the dynamics from the center.
  2. The resistance line. It is located at the bottom and shows the maximum average deviation of the dynamics from the center.
  3. The central line. It shows the trend, making it easier to notice price fluctuations.

  

The price moves close to the support and resistance lines, periodically bounces off them, which shapes an understanding of the current situation in the market.

 

Using signals from the indicator

The Linear Regression indicator belongs to trend indicators, the main purpose of which is to determine the current trend in the market. In addition, the tool helps to determine the direction of the trend, its strength and inform about possible retracements in a timely matter. The disadvantage of the indicator is the redrawing of the chart after each bar is closed.

To correctly interpret signals from the Linear Regression indicator, it is important to remember:

 

 

  1. The direction of a trend is determined by the central line. If the line goes up, it means that an uptrend is dominating, if it goes down, a downtrend is being formed.
  2. The movement of the asset price in the direction of the trend from one boundary of the formed channel to another indicates momentum. In other words, if the price bounces off the boundary against the trend, it means a retracement, but if it is the other way around, the trend begins to recover.
  3. If the price bounces off the lateral lines, the current trend is likely to continue.

 

Note that the Linear Regression indicator itself does not create points of market entry and exit, so you should combine it with other indicators. Nevertheless, a trading behavioral strategy can be based on the LRI since it forms a channel favorable for trading.

What to use alongside the LRI?

You can combine the Linear Regression Channel with any other indicators and oscillators. It all depends on personal preferences, the chosen strategy, the way you trade, and other factors.

Let us consider the most common options:

In combination with Stochastics. A trade can be opened once the regression channel is directed downwards, and the price crosses the trend line. It is also worth entering a trade if the indicator is as close as possible to the lower boundary of the channel. At this point, the Stochastic will be showing an upward cross pattern, leaving the oversold area and going above 20. It is worth selling assets if the formed Linear Regression is directed upwards, and the price is above the trend line or has already reached the support level. At this point, Stochastics will be showing a downward cross.


In combination with Bollinger Bands. The correct signal to buy an asset is the price being near the lower Bollinger Band and at the lower boundary of the regression channel at the same time. When the price is close to the support level and the upper boundary of the Bollinger Bands, it is worth selling the asset.

 

The indicator operates objectively since it is based on a clear mathematical formula, which excludes the possibility of producing a subjective result. However, you can eliminate unnecessary noise and determine adequate entry and exit points only using additional technical analysis tools.

If you doubt whether you will be able to recognize signals in time and objectively interpret them when trading in Forex, we advise you to check  Expert Advisor. It is an advanced piece of software that runs on tried and tested algorithms, as well as does not make mistakes or get tired. You will be able to do anything you want while the trading robot will work for you, increasing your capital and protecting against rash actions, even if your terminal is closed.

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