Regression Trend Channels

A Regression Trend Channel (RTC) is simply the mathematically standard deviation of the linear regression. The RTC is made up of three parallel lines. The center line is a linear regression. This center line is bracketed by two additional lines that represent the standard deviation of the linear regression price data. The RTC is calculated using the actual prices of the bars in the trend.

How to Use RTC:

The break of a RTC represents a change in trend or a change in bias and so can be used as an entry or exit signal.

In many ways it is similar to a moving average. The difference with the RTC there is there is no lagging the linear regression trendline and, secondly, it is helpful because it often identifies a change in trend or bias more quickly than a moving average.

Terms: A linear regression trend line is the straight-line mathematical measurement of the relationship between sets of price data that plot out as a trend line. More simply, a linear regression trend line is a straight line that best fits a set of points. With bar charts the points used to calculate the trend line can be derived in many different ways. For example they can based on the high, low, or midpoint of the bars.

A standard deviation is a measure of the dispersion of a frequency distribution that is the square root of the arithmetic mean of the squares of the deviation of each of the class frequencies from the arithmetic mean of the frequency distribution. What is important for our purposes is that one standard deviation from the mean captures 68% of all observations and two standard deviations captures 95% of all observations (assuming normal distribution).