Learn How to Trade The Linear Regression Channel – With Illustrated Diagram

Disclosure: Your support helps keep Commodity.com running! We earn a referral fee for some brokers & services we list on this page. Learn more...

This page is about the Linear Regression Channel. If you are interested in the Linear Regression Curve or Linear Regression Line please select the links below:

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. For more information, see: Linear Regression Line.
  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.

The 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:

 
linear regression channel of the S&P 500

 

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.

Linear Regression Channel Possible Buy Signal

When 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.

Linear Regression Channel 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 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.

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.

How to Get Started Trading

If you are interested in trading using technical analysis, have a look at our reviews of these regulated brokers available in to learn which charting & analysis tools they offer:

Loading table...

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.0%-89.0% 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.

Further Reading

Learn more about technical analysis indicators, concepts, and strategies including Momentum, Elliot Waves, Market Thrust, Moving Averages, and Fibonacci Patterns.

Also see our guides on Forex, Crypto and Option brokers to find out which tools brokerages offer their clients.

[[{{Country}} Welcome]]
[[{{Country}} Welcome]]