Linear Regression Trendline & Indicator

Linear regression trendline is a simple statistical indicator to predict future prices/trends based on past prices; or to extend past prices to the future. It is an indicator based on linear regression. Linear regression trendline is plotted as a straight line through the past price chart using the least squares method. This helps in minimizing the distance between prices and the trendline.

The idea behind linear regression trendline is future prices go inline with current prices. Most logical way that one can predict tomorrow’s price is – close to today’s price. For example, if the price is in upward trend, then tomorrow’s closing price (usually) can be the point of linear regression trendline which is above and close to today’s closing price. Linear regression trendline is considered as the ‘equilibrium price’. Price movements above or below the trendline can be a buying/selling opportunity. Price deviations from trendline are considered short-lived and the price is expected to return to the trendline.

Linear regression indicator or LRI plots multiple linear regression trendlines. It acts as a moving average of linear regression trendlines. But there are two key differences, unlike moving averages it do not have much delay and it actually forecasts future trends.

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