Regression Channel

The regression channel is an analytical graphing tool that is based on the Linear Regression line. There are several types of regression channel that differ mainly by how the distance to the upper and lower channel lines are calculated:

•  Standard Regression Line - the distance is based on a selected number of standard deviations;
•  Raff Regression channel - the distance to the channel bands is equal to the distance to the farthest point, whether above or below the Regression line;
•  Error Line - the distance is based on the number of standard errors.

The most common selection of the upper and lower bands of the channel is when a user has an ability to set the distance based on the previous price reversal points. Many traders, in addition to the main bands, use additional 50% bands that extend for half of the main bands' length.

In technical analysis, the Regression channel is used to trade along the trend by assuming that the general trend will follow the Regression line. Thus, the upper and lower bands are drawn in the way in which that 80-90% of the price actions are placed between the bands. The periods when the price moves below the lower band line are considered to be periods for buying and periods when the price moves above the upper band are considered to be periods for selling. Since the general price trend that is defined by the Regression line can be broken and the price could remain for a prolonged time above the upper band or below the lower band, a conservative approach might be to move the buy and sell points to when the price moves back inside of the channel.

The NASDAQ 100 chart below shows the use of the Regression Channel in technical analysis.

Chart 1: NASDAQ 100 chart with regression Channel

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