Dynamic Linear Regression Channel
- Indicators
- Quang Huy Quach
- Version: 3.0
The Linear Regression Channel is a powerful technical analysis tool that helps visually identify the prevailing trend and potential price zones.
Essentially, the indicator performs two main functions:
- It draws a trendline through the center of price action over a specified period. This line is calculated using the linear regression method, which results in the best possible "line of best fit" for the price data.
- From this center line, the indicator plots two parallel lines above and below, creating a price "channel." These lines are placed at a set number of standard deviations away from the center line.
The result is a dynamic channel that automatically updates with market movements, helping you to easily identify the trend and dynamic support/resistance levels.
Indicator Components
The indicator displays the following visual components on the chart:
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Live Channel (Green/Red):
- Center Line (Solid): This is the linear regression line, representing the "fair value" of the current trend.
- Upper & Lower Channels (Dashed): These act as dynamic resistance (upper) and support (lower) levels. The price tends to oscillate within these two lines during a sustained trend.
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Broken Channel (Blue, Dotted):
- When a trend ends and reverses, the indicator "stamps" the old price channel onto the chart.
- Purpose: This helps you visualize the structure of the previous trend, identifying past support/resistance zones that the price may react to in the future.
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Trend Status Label (Arrow):
- A small arrow at the beginning of the live channel indicates the status of the current trend.
- Vertical Arrow (Up/Down): The trend is strengthening (accelerating).
- Diagonal Arrow (Up/Down): The trend is weakening (decelerating).
- Horizontal Arrow: The market is ranging (no clear trend).
How to Apply in Trading
This is a versatile indicator that can be used in several ways:
a. Trend Following
This is the most basic and safest method.
- Identify the Trend: If the channel is sloping upwards, you should only look for BUY opportunities. If the channel is sloping downwards, you should only look for SELL opportunities.
- Find Entry Points:
- In an uptrend (upward sloping channel), wait for the price to pull back to the center line or the lower channel line. These are potential buying zones.
- In a downtrend (downward sloping channel), wait for the price to rally to the center line or the upper channel line. These are potential selling zones.
b. Short-Term Mean Reversion
This strategy is riskier and requires more experience.
- When the price touches or exceeds the upper channel, it can be considered "overbought." You might look for a short-term SELL order with the expectation that the price will revert to the mean (the center line).
- When the price touches or falls below the lower channel, it can be considered "oversold." You might look for a short-term BUY order with the expectation that the price will bounce back towards the center of the channel.
c. Spotting Trend Changes
- "Broken Channel" Event: The appearance of a blue, dotted channel is a very clear visual cue that the previous trend has ended. This is a time to be cautious with existing trades and prepare for a new trend.
- "Trend Flip" Alert: Enable alerts to get an immediate notification when the channel's slope changes direction.
- Channel Breakout: When the price closes decisively outside the live channel, it can be an early sign that the current trend is ending and a new, stronger trend may be starting in the direction of the breakout. Use the "Channel Breakout" alert for this.
Explanation of Input Parameters
- InpLength : The number of bars used to calculate the channel.
- A higher value (e.g., 200) creates a more stable channel, suitable for higher timeframes and long-term trends.
- A lower value (e.g., 50) creates a more responsive channel that follows the price more closely but can be "noisier."
- InpDeviation : The width of the channel, measured in standard deviations.
- 2.0 is a standard value that contains about 95% of the price data.
- Increase this value for a wider channel, or decrease it for a narrower one.
- BrokenChannelScan : IMPORTANT! This is the number of past bars the indicator will scan for broken channels on startup.
- The default of 2500 is a good balance between performance and detail.
- For the fastest possible performance, set this to 0 .
- If you need to see very old broken channels, you can increase this number.
- ShowTrendLabel : Toggles the trend status arrow on or off.
- EnableAlerts : Toggles all alerts (trend flips, channel breakouts) on or off.
- Other Parameters: Allow you to customize the colors and width of the lines, whether to show Fibonacci levels inside the channel, and whether to extend the lines into the future.
