The Linear Regression Channel is a three-line technical indicator designed to assess the upper and lower boundaries of an ongoing trend. Linear regression serves as a statistical method for forecasting future values based on historical data, helping to identify when prices may be excessively high or low. This channel provides potential buy and sell signals by analyzing price volatility.

The channel consists of three components:

• Linear Regression Line
• Upper Channel Line
• Lower Channel Line

The Linear Regression Line is a straight line that best represents the prices between a specified starting and ending point. A "best fit" line minimizes the distance between the actual price points and the Linear Regression Line. This line is crucial for determining the direction of the trend and acts as the midpoint of the trend. It can be viewed as the "equilibrium" price, where movements above or below the line suggest overenthusiastic buyers or sellers.

When prices stray above or below the line, it is expected that they will revert towards the Linear Regression Line. Prices below this line are considered bullish, while prices above it are deemed bearish.

The Upper Channel Line runs parallel to the Linear Regression Line, typically positioned one to two standard deviations above it, marking the peak of the trend. Conversely, the Lower Channel Line is parallel to the Linear Regression Line and is usually one to two standard deviations below it, indicating the trend's bottom. Both channel lines are equidistant from the Linear Regression Line, with a default standard deviation setting of "1," meaning that 68% of all price movements fall between the Upper and Lower Channel Lines. When prices break outside these channels, buy and sell signals are triggered.

There are two types of Linear Regression Channels, determined by the trend's direction:

• Bullish Linear Regression Channel
• Bearish Linear Regression Channel

These channels are characterized by their slope:

Bullish Linear Regression Channel

The bullish Linear Regression Channel signifies a bullish trend, where prices are rising and the slope of the Linear Regression is positive.

Bearish Linear Regression Channel

The bearish Linear Regression Channel indicates a bearish trend, with prices declining and the slope of the Linear Regression being negative.

To create the Linear Regression Channel, select the starting point of a trend and extend the indicator to another point within the trend. The three lines of the channel will automatically adjust based on the trend's upper and lower limits, with the Linear Regression Channel (middle line) appearing between the Upper and Lower Channels.

Trading with the Linear Regression Channel involves monitoring price interactions with the three lines. Each time the price touches the Upper or Lower Channel, it may signal a potential turning point on the price chart.

Buy Signal

If you anticipate a continuation of the trend and the price dips below the Lower Channel Line, this should be viewed as a buy signal. Confirmation can be sought by waiting for the price to rise and close back within the Linear Regression Channel.

Sell Signal

If you expect the trend to continue and the price rises above the Upper Channel Line, this should be interpreted as a sell signal. Confirmation can be obtained by waiting for the price to fall and close back inside the Linear Regression Channel.

When prices remain outside the Linear Regression Channel for extended periods, it often serves as an early indication that the current trend may be concluding and a reversal could be imminent.

The application of standard deviation can help identify when prices might be overbought or oversold in relation to the long-term trend.