Trading with Linear Regression Curve, Using Linear Regression Curves

Wednesday, February 3, 2010

Trading with Linear Regression Curve

Linear regression curve is a useful indicator created on the basis of linear regression. It is a curve line that best fits the prices of a time period. In short it can be considered as small linear regression trendlines with hidden ends that are connected to one another at their center portions or can be taken as a moving average of linear regression trendlines. For a better understanding, also read linear regression channels.

Linear regression curve gives the fair value of the stock or other security. This can be used to easily identify long-term and short term price trends, and price deviations. With linear regression curve, traders can use custom time periods to get custom signals. Traders can also generate trading signals.

Signals can be generated when price moves a certain percentage away from the curve. Buy signals can be generated when price moves some points below the linear regression curve and sell signals when it moves above the curve. The idea is that the price will eventually return to the curve (fair value).
Traders can also time their trades. Buy signals can be generated in a good uptrend only when the price moves below the curve. Similarly sell signals can be generated in a downtrend when the price moves above the curve.