Linear Regression Channel

A "Linear Regression Channel" (LRC) is created by drawing an equal Standard Deviation (SD) distance from the "Linear Regression" based trend line. A "Linear regression" trend line shows equilibrium prices, where as "Linear regression" channels show the deviation of prices from the equilibrium or center line. A "Linear regression" channel is plotted on the price chart using the least squares method. In a LRC, the bottom channel indicates support and the top trend line indicates resistance. Prices trade within the LRC, and when prices exceed the upper or lower trend line, it signals a potential reversal. If the prices continue to close outside the LRC for about half of LRC length bars, then it may be signaling a trend change and a potential formation of a new LRC. Many traders use LRCs with the price-action to find key entry/exit trading opportunities.

Trade: Wait for a LRC to form for at least 12-15 bars. Price closing outside the LRC suggests potential breakout/breakdowns. Traders enter above the high of the breakout bar for a "long" trade and below the low of the breakdown bar for a "short" trade.

Target: The range prior to the LRC formation would be the target from the breakout or breakdown level.

Stop: Place a "stop" order 1 tick above the high of the LRC for "short" trades and 1 tick below the low of LRC for "long" trades.

Trading LRC

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