The Linear Regression Channel is a technical indicator consist of three parallel lines, the median line, upper line and lower line. This indicator is used to predict future trend of price movement from past data. The Linear Regression Channel was developed by Gilbert Raff, that why, indicator is often called Raff Regression Channel. It is used to predict the upper and lower price limits of exiting market trend. It help the traders and investors to find finest exit and entry points during the price trends on the chart.
Upper Line – the upper Linear Regression Line is built going through the utmost projecting highest on the chart. It marks top of the trend. The median and lower line will be parallel to upper line.
Median Line – it is considered base line of Linear Regression Channel. It is drawn at equilibrium distance from upper and lower line. It indicate midpoint of market trend.
Lower Line – it is drawn below the median line, projecting bottom on the chart. It marks the bottom of the market trend. The median and upper line are drawn parallel to lower line.
The Linear Regression Channel provide an effective knowledge to take decision of entry and exit point in market. Each time when price interact with lower or upper line of indicator, there must be a chance for change in market direction. Another strong signal is dramatically breakout from channel. When price breakout the upper or lower line of regression in opposite direction, it gives a strong signal that breakout will create substantial turning point in price action.
Depending on the direction of the trend, there are main two types of Linear Regression Channel, bullish and bearish.
Bullish Linear Regression – in represents bullish market trend. In this case, the price of market is continuously increasing, so the slope of bullish regression line is upward.
Bearish Linear Regression – it shows bearish market trend. The price of market is continuously decreasing, so line is drawn in downward direction.
The Linear Regression Channel is one of the most important technical indicators for identifying entry and exit point within the market trend. This indicator can be more fruitful if used in conjunction with other technical indicators.