Regression TrendlinesTechnical Analysis
Linear Regression Trendlines are systemized trendlines that typically are automatically drawn by a charting platform. Regression trendlines are mathematically calculated trendlines drawn through the middle of the trend, so it cannot function as a supportive trendline or a resistance trendline.
Unlike freely drawn lines, you don’t pick where in the bar the line is started. It automatically attempts to minimize the distance between the highs and the lows, while maintaining equal distance between highs and lows in the trend. Thus, it directly attempts to draw the “truest” line of price in the trend. Note: This does not mean it goes through the center part of each bar, since it follows the center of the overall highs and lows in the trend. If your software platform does not have this feature, you would need to do a fairly complex statistical calculation for each bar. You’ll use the Linear Regression Line simply to detect the trend’s direction. It is not used as a trading indicator, but simply an informational source.
The linear regression trendline attempts to eliminate personal bias from identifying the trend, giving a statistical based indicator of where price has been, and thus is likely to go in the future. While bias is essentially eliminated from its interpretation, bias cannot be eliminated from its selection process. This is a serious issue, since the slope can change drastically with each bar included or eliminated from its selection. If data selections included are terrible, the slope will be terrible, and irrelevant to the accuracy of the trend.
The start and ending points are the biggest potential barriers to quality results from linear regression trendlines. The easiest way to solve this problem is to draw from an obvious new high or an obvious new low, but even this method has obvious interpretation issues.
Another most common mistake with linear regression lines is attempting to include trend variations inside of one linear regression line. These variations can be multiple trends, an acceleration or deceleration of the trend. This execution is just as bad as selection bad points, and should be equally avoided.
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