Linear Regression Channel Indicator for MT4
The linear regression channel indicator for MT4 is one of the technical indicators that plot its values based on mathematical formulas. While there are many other technical indicators such as moving averages or oscillators, the linear regression channel indicator falls into an advanced mode of calculation for the price.
In a way, the linear regression channel indicator tends to be predictive in nature. Therefore, it is not surprising to see why traders flock to the linear regression channel indicator. But do not make the mistake of thinking that the linear regression channel will show you where the price will be.
On the contrary, the linear regression channel indicator will show you the potential price values for the price. When there is a deviation from the regression values, traders can exploit the anomaly in the markets. But trading with the linear regression channel is not as simple as buying or selling when price moves away from the channel.
Sometimes, depending on the strength of the trend, the price can continue to maintain the moment and deviate further away from the linear regression channel.
As the name suggests, the linear regression channel belongs to the group of channel indicators. Channel indicators are used to understand the deviation in price. When price tends to deviate away from its regular course, you can expect to see a correction in prices.
The linear regression channel indicator plots on the price chart. The values are determined based on the settings that you input. Therefore, changing the values of the indicator can show different results.
It is recommended that traders first practice using this indicator on a demo trading platform before using it in the real markets. Further validity from other technical indicators is also recommended. Using the linear regression channel indicator isolation can lead to potential losses.
Using oscillators is a great way to complement the use of the linear regression channel indicator.
How to use the linear regression channel indicator
As the name linear suggests, this indicator plots the channels in a somewhat straight line. But do not mistake the straight lines to be support and resistance levels, although they do represent these in one way or another.
The linear regression channel indicator is a custom indicator which can be downloaded from this article. Open the indicators folder of your MT4 trading platform and move the ex4 file.
Restart your MT4 trading platform and refresh the navigator window in order for this newly installed indicator to show up. You can either double click or drag and drop the indicator onto the chart of your choice.
The configuration settings for the linear regression channel indicator is very simple as can be seen below.
Linear regression channel indicator configuration
As you can see, there are just two settings in the configuration window. The first set shows the number of bars back to calculate. The default is set to 1000. This means that the number of bars in the lookback period is 1000. The higher the values, the more reliable the indicator can be.
But on the same note, they can be very lagging. This means that the linear regression channel indicator does not react to the most recent price action behavior. Therefore, if the price volatility was stable over the past 1000 bars or sessions, you can see the linear regression channel indicator to remain flat without any major adjustments.
On the other hand, if the price of the past 1000 bars has been very volatile, you can expect the regression channel indicator to potentially shift direction and exhibiting a slanting line.
The band deviations setting basically allows you to set the number of standard deviations away from each other. The default is set to 0.05 which is nothing 0.05 percent deviation. As you can see from the settings, the linear regression channel indicator combines standard deviations and the price action from the lookback period. This basically results in three lines being plotted on the chart.
The next chart below shows how the linear regression channel indicator looks like when you have finished the configuration set up.
Linear regression channel indicator MT4
Depending on where the price is, you can expect to see a reversal. In the above chart, if you look from the left, you will see that price reversed near the upper or the outer blue regression channel. Likewise, there are also instances when the price has been bouncing off the lower regression channel.
But eventually, price breaks this lower band and trades outside of the channel. As we mentioned earlier, this happens because of the number of the look back periods. Using a smaller value can make the linear regression channel to keep changing all the time. Traders call this a repainting indicator. Repainting is merely a reflection of the indicator adjusting to the new values given by the markets. Therefore, there is nothing wrong with it. But many traders avoid using a repainting indicator for obvious reasons.
Thus, to prevent the linear regression channel indicator from repainting too often, the lookback period is set to 1000 bars. It is recommended that you change these values to find the ideal number that can be used in the markets.
Linear regression channel indicator - Conclusion
The linear regression channel indicator can be applied to any markets and any time frame of your choice. It is a purely math-based technical indicator that deals with probability and are primarily used as a tool to depict the upper and lower ranges of the markets. Depending on the standard deviation setting, the indicator serves to act as a dynamic support and resistance indicator on the chart.
As mentioned earlier, it is not recommended to trade just based on the linear regression channel indicator. Rather, using oscillators and other technical indicators such as moving averages can help to give you some scope of the context for the markets that you are trading.
Traders should also spend a bit of time in understanding how the linear regression channel indicator behaves to the ever-changing price action for the security that they are trading.