The Linear Regression Indicator plots the trend of a security's price over time. That trend is determined by calculating a Linear Regression Trendline using the least squares method. This ensures the minimum distance between the data points and a Linear Regression Trendline.

A typical Linear Regression Indicator will hug the price well, reducing lag time by turning two bars earlier than a normal simple moving average and one sooner than an exponential moving average.

A Linear Regression Reversal differs from the Linear Regression Indicator in that it is a binary indicator that displays +1 when the price direction is up and a -1 when the price direction is down. The movement between +1 and -1 is an indicative of price reversal.

This indicator can provide both long and short term signals. One may view a +1 as a long position and a -1 would be taken as a short position. These entries occur only when the next price bars broke or closed above the high or lower than the high (respectively).

It is a variation on a theme, buying on dips and selling in rallies.

Disadvantages to this indicator are its tendency to reverse more often in sideways trading ranges or with minor corrections in a trend, though it can be advantageous in short term price swings.

Further information on Linear Regression Reversal can be found in the December 2003 issue of Technical Analysis of Stocks and Commodities

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