This is a short digression from my currency ETF pair studies but the linear regression channel was so obvious yesterday that I considered it worthy of note. Regular readers know that linear regression (LR) channels are a critical element in my technical trading toolbox and today’s chart is graphic evidence why.
There are at least two issues with linear regression channels that deserve closer scrutiny. First is their fractal nature and second is the difficulty in forecasting their presence until the channel is well formed. The above chart is of 1o minute bars but it easy to see that within this 17 hour time frame there are also much shorter term LR channels that can be seen on one minute bars and that each spans about 60 minutes. From a tactical standpoint therefore, in the process of charting these CR channels each trader must define the time frame, time increment and degree of volatility or swing that constitutes the trader’s risk management plan.
Regarding the second issue, knowing when a LR channel is in effect and when price is simply meandering is the trader’s real task. The LR channel bands provide a clear road map of sloping support and resistance targets, but for an improved comfort level with the signals I typically rely on both the parabolic SAR and price position within the 8/8 SMA hi/lo channel to confirm that the LR channel boundaries are still valid. This is a subject for a much larger analysis but my intent here is simply to expose traders unfamiliar with this tool to its potential value.
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