Linear Regression Indicator For MT4
The Linear Regression Indicator For MT4 employs the least squares method to plot a linear regression based trend line. A linear regression trend line is a straight line that best fits a starting price and an ending price. By best fit is meant a line that is so constructed that there is minimal space between the two price points under consideration and the Linear Regression line. Traders usually view the Linear Regression line as representative of the fair value of a financial asset. When price goes above or below, traders can expect a return to the Linear Regression line. As such, when an asset trades below the Linear Regression line, speculators can look to go long. Conversely, when prices are above, shorting is usually successful. Of course, as with everything else in technical analysis, other confirmatory signals like Pivot break or indicator crossover should be sought before initiating a trade.
Trading ideas with the Linear Regression Indicator For MT4
The linear regression indicator is simply there to give us an approximation of the current trend direction. To achieve this approximation, it uses a formula known as the least-squares method, and therefore it is able to prove reliable for knowing what the current marketing trend direction is. Looking at the image below you can see that there is a total of 7 lines used.
You get the middle regression line and those other three separate lines above and below running in parallel to the main linear regression line. These other parallel lines are reliable guidelines for evaluating the movement of the market relative to these points. So ultimately you can think of them as dynamic resistance and support levels which adapt to the continuous changes of the market as calculated by the linear regression indicator.
Linear Regression Indicator For MT4 - How-To Guide And More Trading Ideas
When the market is trading below the main or middle linear regression line, you should deem it as an interim downtrend whereas when it is trading above the main or middle linear regression, you should deem it as an interim uptrend.
But there is one main use case for this indicator - is that we should use it for identifying mean reversion trade setups. So the mainline is the main linear regression line which is red. We will then look for opportunities to enter the market as it returns back to the middle line.
If the market breaks this middle line and trades below it for a while - we will then wait for a bullish price action pattern to appear. That will give us a clear sign that the market is most likely about to revert back to the main regression line. This is a great moment to buy.
On the contrary, if the market breaks the middle line to the upside and hits the highest line of the indicator we will look for a reversal short trade setup that ultimately triggers our sell orders with a target set at the middle line. This simple concept forms the basis of mean reversion trading.
As you can see in the 1-hour chart, the market is trading up and what happened is that it broke through the middle linear line to the upside and then it painted a bearish engulfing pattern which was a good entry point for us to sell with a target set at the main linear regression line.
Now if you look at the latest price action you can see that the market went on to sell off and hit the extreme bottom line of the linear regression indicator.
At this point, there was conclusive piece information for us to buy. Nevertheless, if in such cases the price action prints a bullish engulfing pattern or if the current candlestick actually closes quite closer to the opening price point, then we will definitely open a buy with the target set at the main linear regression line. This is exactly what had transpired after - as shown below.
I should point out to you at this stage that the main target and the two other lines that you see in your screen, should serve as your immediate take profit targets because remember these lines act as support and resistance levels.
Therefore, the market could turn around from these points and not even hit the middle line so it is best to split up your trades into three individual trades with separate dedicated or separated take profit targets. If it hits the first take profit target or the second take profit target you should move all your stop losses to break even.
In this way, you will ensure that most of the risk, if not all, is taken off the table. The next point I wanna bring to your attention is that we can use the indicator to extend these linear regression lines and use them as support and resistance lines on the lower time frames.
So what I mean by that, is that you can simply activate the trend line drawing tool and then trace over the various support and resistance levels as indicated by the linear regression.
Then once that is done, the linear regression indicator may be deactivated so that you can switch down to the lower time frame to see the support and resistance lines drawn. You will use these guidelines in the interim as support and resistance levels.
Just bear in mind that the linear regression indicator is always updating itself and therefore the angles will change so this only works for a short period of time. Therefore, you need to make sure that from time to time, you always reactivate the Linear regression indicator and then adjust your S and R lines according to the latest angles of the indicator.
Linear Regression Indicator For MT4 - Conclusion
The linear regression tool is a must-have indicator which can be used for scalping. The above trading methods revealed exactly how you can go about using this powerful indicator to your advantage. The ultimate goal is to make profitable use of these resources therefore follow up with proper simulations and well-timed entries.