A trading edge is any strategy which you expect to make a profitable return if used repeatedly in the long term. This article is going to discuss a statistical technique known as linear regression and see how it applies to trading. Linear regression attempts to model the relationship between two variables, given a collection of data values. With Forex linear regression trading, the two variables we are interested in are time and price. If the prices move a sufficiently significant distance away from the median line, they can be thought of as statistical outliers.
One way is to utilise the statistical concept of a normal distribution and the accompanying measure of standard deviation. To understand better this standard deviation Forex strategy, let's quickly have a run-through of what we mean by these terms.
Standard deviation is another statistical measure and quantifies how scattered the values are in a data set.
The further we get away from the middle of the bell, the smaller the chances are of those values of X occurring. Linear regression channel indicator comes as a standard tool with MetaTrader 4. Note that Standard Deviation is also available as an option, of which more later. The median line is the line of best fit for the closing prices contained within the selected period.
The strategy revolves around the expectation that once the price moves out to an outlying level…. So, a suggested method of using this indicator is to assume trend continuation and trade in the direction of the trend. While that trend persists, we can think of the median line as being a kind of equilibrium point.
Obviously this kind of median line trading is susceptible to breakouts that result in a new trend forming. This is why you must be careful with trend analysis regression and ensure you are disciplined with your risk management. Now it should also be pointed out that you are not limited to using only a single regression channel. If we select standard deviation, we can add lines that are a multiple number of standard deviations away from the median.
In the image above, the value of deviations equals 2. Additionally, Ray is ticked, which causes the lines to extend infinitely to the right on the chart. It now adds a second regression channel, with lines two standard deviations either side of the median line. We can also draw smaller channels within a larger one in order to identify smaller trends within the overall larger trend. If you're interested in exploring regression trading further, there are other, more complex versions with which you can experiment.
Moving average regression and polynomial regression forex analysis are just a couple of examples. Correspondingly, moving linear regression indicator and polynomial regression channel are analysis tools that would involve the areas mentioned above. It's the ultimate plugin for MT4, with its own package of indicators and a wealth of trading aids.
At its heart, linear regression is a method of estimating the undefined relationship between price and time. If you want to try out linear regression trading without any risk, our demo trading account is a good place to experiment. There are many other popular types of trend channel analysis that you can use, such as Keltner channels and Donchian channels..
Another way of confirming your technical analysis linear regression signals is by looking at multiple time frames. Looking at the same channels on a longer timeframe may reveal aspects you hadn't noticed before. We hope you found this article interesting and we wish you success with forex linear regression method of trading.
Using Forex linear regression to see the big picture. Android App MT4 for your Android device. MT WebTrader Trade in your browser. MetaTrader 5 The next-gen. Forex and CFD trading may result in losses that exceed your deposits. Please ensure you understand the risks involved.More...