A Linear Regression Line is a straight line that best fits the prices between a starting price point and an ending price point.
A “best fit” means that a line is constructed where there is the least amount of deviation between the price points and the actual Linear Regression Line.
The Linear Regression Line is mainly used to determine trend direction. A chart of AT&T (T) stock is given below:
Traders usually view the Linear Regression Line as the fair value price for the future, stock, or forex currency pair (major or cross). When prices deviate above or below, traders may expect prices to move back towards the Linear Regression Line.
As a consequence, when prices are below the Linear Regression Line, this could be viewed as a good time to buy, and when prices are above the Linear Regression Line, a good time sell.
Of course, this is a very simple test. Other technical indicators would be used to confirm these crude buy and sell signals.
A useful technical analysis charting indicator that uses a Linear Regression Line is the Linear Regression Channel (see: Linear Regression Channel), which gives more objective potential buy and sell signals based on price volatility.
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:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.90%-89.00% 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.