Linear Regression R2 indicator is used to ascertain the strength of the dominant market trend. It is one of the indicators calculated by using the Linear Regression technique. We have already seen the usage of LR in Linear Regression Forecast indicator and also in Linear Regression Intercept indicator. LR R2 indicator is used to determine the intensity of the rise or fall of the market trend. This provides a means of quantifying the strength of the trend.
The Linear Regression R2 indicator function determines the extent of a linear relationship of a value to time. This is the more closely prices move in a linear relationship with the passing of time and the stronger the trend. In a period, this indicator shows the strength of the trend. The Linear Regression R2 indicator measures the extent of a security’s movement that can be explained by the linear regression.
In Zerodha Kite this indicator is known as Linear Reg R2. This is available under the STUDIES section and can be attached to a chart as shown below in the example of Reliance Industries intraday trading chart.
As you see in the image above in Zerodha Kite, the default parameter of Linear Reg R2 indicator is 14 and the indicator is plotted on the value of CLOSE. But you can change the parameter if you like and also calculate the value on any other field like OPEN, HIGH, LOW etc. The Linear Regression R2 indicator is very useful as a corroborating indicator. In the momentum indicators and moving averages, there is a need for validation of trend to be effective constantly. In this Linear Regression R2 is used with the Regression Slope indicator and the Slope indicates the overall market trend – i.e. either positive or negative, and the R-Squared indicates the strength.
This Linear Regression R2 indicator is very valuable as a confirming indicator. In the momentum indicators like Stochastics, RSI, CCI, etc and moving average indicators need a validation of trend in order to be reliably useful. This Linear Reg R2 indicator offers a way of indicating the intensity of the trend of prices.
Advantage And Disadvantage –
The Linear Reg R2 is used as a confirming indicator and it also has predictive value. This indicator can be used with other indicators for identifying possible entry and exit levels. Also, it uses the best fit least squares technique, there is no delay unlike in the moving averages. The Linear Regression R2 indicator can be used to determine the confidence and efficiency of the Linear Regression calculation. It is an intensive calculation and it should not be used by itself. The indicator can sometimes provide false positive signals, as a high confidence score does not necessarily mean a 100% probability of price movement being in line with the calculated regression line.