regression Line

A Linear Regression Line is a statistical tool that is used to predict future price movements. The regression line is draw as the straight line that best fits prices in the user defined period of time. Since the purpose of the Regression line is to calculate a statistical, linear, trend direction by removing noise (volatile price fluctuations), it is considered to be the most correct linear direction of the trend in a given period of time.

In technical analysis, a Linear Regression Line is used as the fair value price of the stock (index, futures or other tradable commodity) and when price moves above and below this line, traders expect price to go back towards the Regression Line. Moreover, one of the ways of using Regression Line is to buy when the price moves below the Regression Line, but has started to move towards it. Conversely, a trader may consider selling when the price is above the Regression line and it has started to move towards the line.

The NASDAQ 100 index chart below show one of the possible uses of the Linear Regression Line.

Chart 1: NASDAQ 100 chart with Regression Line

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