Confirming Price Trend by Barbara Star, PhD
Regression And R-Squared, Together Again
Confirming Price Trend
Here’s a technique using linear regression slope and r-squared
to confirm the price trend.
Linear regression is a statistical method some
traders use to filter the static, or “noise,” created
by day-to-day or bar-to-bar price movements.
Using the least-squares method, it minimizes
the amount of deviation among price values to determine a best-fit line. In an earlier STOCKS & COMMODITIES
article, I showed that applying a linear regression indicator
to price creates less lag and more trading opportunities
than a moving average of the same length.
As useful as the linear regression indicator is for detecting
price shifts, two other outputs derived from a linear regression may hold equal value for traders. In this article I will
introduce two lesser-known indicators, r-squared and linear
regression slope, which can serve as useful adjuncts when
determining price trend and price direction.
R-squared is a measure of association. It measures the proportion
of explained variation between the linear regression and
the underlying data it is tracking. For traders that means the
r-squared calculation identifies how closely the linear regression
indicator matches the underlying price movement; the
higher the r-squared value, the greater the correlation with
the trending component of price. The eSignal code can be
found in sidebar 1, “eSignal code for r-squared.”