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Linear regression is used to predict future values from past values using statistics - often showing when securities are overpriced. Using the least squares method, a straight line can be drawn thru a trend having the minimum distance from actual prices. As this resulting trendline is in the exact middle of the prices, any move above or below suggests the security is either overbought or oversold. An extension to this is 'Linear Regression Channels' - rather like Bollinger Bands, these are two parallel lines above and below the trendline at a fixed distance (the maximum distance in the timeframe under examination). The bottom channel line tends to provide support and the top channel line provides resistance, with any extended move outside the channel suggesting a reversal in the trend. Probably more useful to swing traders than those traders day trading, linear regression lines nonetheless may have their place.The calculation for the linear regression trendline is outside the scope of this article. |
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