Linear Regression Slope Indicator Formula, Strategy

Linear Regression Slope Indicator

Linear Regression Slope Indicator is one of the technical indicators by using the linear regression (LR) technique which is applied in technical analysis. The slope value is crucial if one is comparing the market that trade within different ranges. The normalized slope value actually reflects the price change per bar of the regression line. This indicator determines the direction strength of a trend. When the market is trending up or down and what is the intensity of the rise or fall.

Common FAQ on Linear Regression Slope Indicator

What is Linear Regression Slope?

This is an indicator that uses the linear regression technique to determine the directional strength of a trend. This calculates the slope value of a theoratical regression lines which include the current candlestick and the prior candlesticks. The slope is generally positive and above the zero line in an uptrend. On the other hand the slope is negative in a downtrend and it is then extending below the zero line.Linear Regression Slope

How to Calculate Linear Regression Slope?

The formula of the LR line is Y = a + bX. Here X is the variable, b is the slope of the line and a is the intercept point. So from this equation we can do back calculation and find the formula of the slope. The slope value is found by multiplying the raw slope value by one hundred and then dividing the result by the price.
Linear Regression Slope Formula
The detailed formula of the LR Slope can be found here. If the LR slope is quoting at 0.25, it means the regression line is increasing at a rate of 25 percent per bar. A slope of -0.60 means the regression line is decreasing at a rate of sixty percent per bar. It is a complex formula for the beginners, but this slope plays an important role in finding the strength of any trend in technical analysis.

How to Calculate Linear Regression Slope in Excel?

The is a slope function in microsoft excel. This can calculate the slope of few data (X) over a few periods (Y). Suppose we have data in A column in rows 2 to 9 and we have other data in B column in rows 2 to 9. We can calculate the slope in microsoft excel as =SLOPE(A2:A9,B2:B9).

How to Attach Linear Regression Slope Indicator in Charts?

The LR Slope Indicator is available in the studies section in Zerodha Kite. Its also included in the new Kite 3 Mobile App. By default the parameter of this indicator is 14, but it can be customized by optionally changing the parameters. The more you increase the period the higher will be the importance of measurement. Check the image above that shows how to attach the indicator as we have done on Nifty index.

Linear Regression Slope In Zerodha Kite

How to Use Linear Regression Slope Indicator?

The Linear Regression Slope Indicator is a centered oscillator type of indicator which is similar to momentum indicators. The momentum is positive when the Slope is above 0 and negative when it is below 0. We can use this indicator to measure the strength or weakness and direction of the momentum.

Linear Regression Slope

Typically this Linear Regression Slope is presented as a Line chart or Histogram below the price chart. We can draw a reference line at 0 which is depending on whether the slope is positive or negative, the slope value will oscillate above or below 0. Check the image above that shows the use of the indicator on HDFC share price.

#1 Simple Trading Logic

So as a simple buy sell system, traders can open a buy order when the slope crosses the zero line and moves to positive territory. On the other hand traders can open short selling order when the slope crosses the zero line from above and moves to the negative territory. But this is a very raw lagging indicator strategy that should be used with other indicators.

Basic Buy Sell Signals Using The LR Slope

Traders can use the Linear Regression Slope indicator to find the directional strength of a trend. As a supporting tool they can use indicators like the Stochastics Oscillator to find good entry points.

#2 Advanced Trading Logic

The Zero Line Reject strategy or ZLR works very nicely also in this indicator just like the Woodie CCI. Once the Liner Regression Slope indicator crosses the zero line upside it is bullish. Next time if it tests zero line again and turns up again this is a valid buy entry. Similarly if the indicators crosses the zero line downside it is bearish. Next time if it tests the zero line again and turns down from there that is a valid short sell entry.

Zero Line Reject

Advantages

We can compare this Linear Regression Slope Indicator for multiple securities to determine relative strength and weakness. We can also use it with other indicators for identifying possible entry and exit levels. And, we can also calculate this for short, medium and long-term to identify changes within the major trend of the security.

Disadvantages

The LR Slope is a lagging indicator and does not predict or signal tops and bottoms. It follows the price trend and provides the signal after the top or bottom has been formed.

Conclusion

The Linear Regression Slope is calculated using the Linear Regression theory. This actually notes the rate of change of the regression line per bar. This is also a lagging indicator and generates signals on the basis of zero line cross. We can use it with other indicators or some other oscillators to fine tune the exact entry and exit points.

Author: Indrajit Mukherjee

Indrajit is a professional blogger and trading system developer. Amibroker expert, Wordpress expert, SEO expert and stock market analyst.Trading since 2002, he has started the journey of StockManiacs.net on 2008. He follows Indian and world stock markets closely.

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