Linear Regression Channel: Learn Why Traders Believe

in It to Spot Trends
commodity.com/technical-analysis/lin-reg-channel

Lawrence Pines

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This page is about the linear regression channel. If you are interested in the linear
regression curve or linear regression line, select the links below:

Linear Regression Line

Linear Regression Curve

Contents [hide]

What Is a Linear Regression Channel?

Linear regression channels are quite useful technical analysis charting tools. In addition
to identifying trends and trend direction, the use of standard deviation gives traders
ideas as to when prices are becoming overbought or oversold relative to the long term
trend.

Similar to the 200-day moving average, large institutions often look at long term linear
regression channels. A linear regression channel consists of three parts:

1. Linear Regression Line – A line that best fits all the data points of interest.
2. Upper Channel Line – A line that runs parallel to the Linear Regression Line and
is usually one to two standard deviations above the Linear Regression Line.
3. Lower Channel Line – This line runs parallel to the Linear Regression Line and is
usually one to two standard deviations below the Linear Regression Line.

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How to Interpret the Linear Regression Channel

This multi-year chart of the S&P 500 exchange-traded fund (SPY) shows prices in a
steady uptrend and maintaining in a tight one standard deviation linear regression
channel.

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 Please note, this is an example – not a recommendation.

The upper and lower channel lines contain between themselves either 68% of all prices
(if 1 standard deviation is used) or 95% of all prices (if 2 standard deviations are used).

When prices break outside of the channels, either:

1. Buy or sell opportunities are present.

2. Or the prior trend could be ending.

Possible Buy Signal

When the price falls below the lower channel line, and a trader expects a continuation of
the trend, then a trader might consider it as a buy signal.

Possible Sell Signal

An opportunity for selling might occur when prices break above the upper channel line,
but a continuation of the trend is expected by the trader.

Other confirmation signs like prices closing back inside the linear regression channel
might be used to initiate potential buy or sell orders. Also, other technical indicators
might be used to confirm.

Trend Reversals
When the price closes outside of the linear regression channel for long periods of time,
this is often interpreted as an early signal that the past price trend may be breaking and
a significant reversal might be near.

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Further Reading
Learn more about technical analysis indicators, concepts, and strategies, including:

For all the basics on how to trade commodities, see our introduction to commodity
trading.

Also, take a look at our guides on stock, CFD, and commodity brokers to find out which
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CFDs are complex instruments and come with a high risk of losing money rapidly due to
leverage. Between 74%-89% of retail investor accounts lose money when trading
CFDs. You should consider whether you understand how CFDs work and whether you
can afford to take the high risk of losing your money.

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