Dynamic Regression Channel Indicator
The dynamic regression channel indicator, also known as a dynamic regression channel indicator with variable polynomial degree belongs to the family of channel indicators. Channel indicators, as the name suggest plot a channel or two lines on the price chart.
There are different ways how the channel indicators can calculate the values. For example, the simplest of all is a channel indicator that can plot the average high and low for the past x number of periods.
When price tends to hit one of the channel’s ranges, the upper or the lower channel, you can expect price to revert to the mean. Mean reversion is a mathematical concept that shows that when price deviates too far away from the median or the average price, it tends to gravitate back to the median price.
The MT4 trading platform has some default channel indicators such as the Envelopes and even the Bollinger band channel. However, the way these are calculated are slightly different. While one focuses on the average of the prices and the channels are plotted some x deviation points away, the other channels such as Bollinger bands are plotted based on the fixed deviation levels.
The basic concept behind using channel indicators is to buy and sell when price is at one of the extremes.
The dynamic regression channel indicator is derived upon the complex mathematical equation of regression. You do not have to fully understand the concepts of regression. But simply put, the dynamic regression channel indicator plots its values based on the mathematical formula for trading price.
What is the dynamic regression channel indicator for MT4?
The indicator is an overlay on the price and shows the potential short term turning points in price.
The Dynamic channel regression indicator with variable polynomial can be downloaded from this article. You will need to install the indicator onto your MT4 terminal. The configuration for the dynamic regression channel indicator is as below.
Dynamic Channel Regression Indicator – MT4 Configuration
The various configuration factors show in the above configuration window is explained as below:
Degree: The degree is the degree of variability for the regression channel indicator. The default is set to 3, but you can change these values as well. The higher the degree, the more far apart are the channel lines.
Kstd: This is the setting that deals with the standard deviation. The default is set to three standard deviations. The standard deviation can vary depending on the instrument that it is being analyzed. For example, currency pairs can exhibit a different level of standard deviation compared to commodities. Therefore, this value should be adjusted depending on the type of markets that you are trading.
Bars: The default setting is set to 250 bars. You can change the values for this. Note that the higher the number, the more lagging and sloping the regression channel indicator becomes. On the other hand, when you use a smaller number for the number of bars on the lookback period, the dynamic regression channel indicator will become more straight in nature.
Shift: As the name suggests, using the shift feature, you can extrapolate the indicator to a few bars into the future. This setting potentially shows where the values of the dynamic regression channel indicator will be. For example, if you change the setting from 0, which means there is no shift to 5, the dynamic regression channel indicator will extend the indicator five sessions ahead. Note that the indicator plots the values depending on the other settings that you have inputted. Therefore, there is a good chance that future values will change.
While the above configuration settings might seem a bit complex for the average beginner in forex trading, you can start with the default values and then experiment with the various combinations that you can use on the charts.
Once the indicator is configured on the charts it is shown as below.
MT4 Dynamic Regression Channel indicator
How to trade with the Dynamic Regression channel indicator
One of the first things you should know about the dynamic regression channel indicator is that it constantly shifts and changes. Unlike regular indicators such as moving averages which are able to maintain the past values, the dynamic regression channel indicator can change the values.
This is because of the very nature of the math that is involved in designing this indicator. Therefore, some traders might not find this an ideal indicator to use. Typically, buy and sell signals are plotted depending on the slope and its direction.
When the indicator is curving downwards, it is recommended to take only sell signals. Sell signals are formed when the price reaches the upper band of the regression channel. Likewise, when the curve is sloping upwards, only buy signals are recommended. You can go long when the price is testing the lower end of the band.
Take profit is set to the opposite band’s value. But depending on the nature of the slope, sometimes you can expect the slope to be quite prominent which could erase quite a bit of potential pips from the trade.
The dynamic regression channel indicator should not be used in isolation despite the fact that it looks very tempting on the charts. This is because the indicator automatically adjusts to the price action and thus, it might seem like a very reliable indicator that you can trade in isolation. The indicator is best used with price action methods such as the horizontal support and resistance levels including combining with potential candlestick reversal patterns.
This will greatly increase the level of confidence in the markets and allows you to trade in the direction of the slope, which simply represents the trends in the markets. Using technical oscillators can also help you to trade the turning points in the markets.
But this is not always the case. It is ideal that you first test this indicator on a demo trading account in order to understand the values are plotted and also get familiar on how to trade the forex markets using the dynamic channel regression indicator.