Linear regression and trend line

A really brief introduction to the "best fit" line through X:Y data.

Watch this video. As a matter of fact all the basic technical analysis are a variation on the theme of the Linear Regression Analysis.

- Trend classification: The trend line is going up - up trend; or the Trend line is going down - down trend

- Finding an entry within the trend: two basic entries:

a. Buyung the dips when in up trend, or Selling the Highs in a Down trend

b. Buying the break - outs over the previous highs or the previous lows.

- Finding when a trend reaches its end. Counter trend entries when the trend - line is violated.

For example Head and Shoulders. And of course there is no reversal pattern unless there was a previous

Trend.



The trend is the technical term very similar with the Linear regression analysis. Of course it is not exactly the same when you form a trend line you are looking to find the lows (uptrend) and the highs (downtrend).

However the linear regression channels are quite popular within Metatrader 4 (mt4) and are a part of some very popular templates of indicators in mt4. Consider also the Andrew's Pitchfork (linear regression again), it is a part of any technical analysis package software mt4 and mt5.

So the idea here is to see that what may looks like some kind of mystical technical analysis tools are in fact an application of basic statistical tools.

And when you form trend lines you are doing that manually and as you will see in the video the linear regression line is the line that minimizes the error.