Channels

Linear regression and standard deviation channels

A best-fit line through the closes of a chosen period, with parallel lines showing how far prices strayed from it.

The idea in plain words

Instead of picking points by eye, let maths draw the line that best fits the prices. The outer lines show the normal spread (standard deviation channel) or the widest deviation (regression channel).

How it is calculated

Click the start and the end of the period. The centre line is the least-squares line through the closes. Standard deviation channel: ± 2 standard deviations; regression channel: ± the largest distance.

Centre = a + b × t (least-squares fit of the closes)
Std-dev channel: centre ± 2 × standard deviation of the distances
Regression channel: centre ± maximum distance

How to use it

Prices near the outer lines are stretched relative to the trend; near the centre, fairly valued.
The slope of the centre line is the average trend over the period.

Drawing conclusions

A close outside a standard deviation channel is statistically unusual.

Example

A 60-day regression on a stock index slopes up 0.2% a day; the price touches the lower line and rebounds to the centre.

Prices in examples are illustrative.

Watch out for

The channel changes when you change the period: choose it deliberately.

A little history

Least squares was published by Legendre (1805) and Gauss; Francis Galton coined "regression" in the 1880s.

Educational content only. No indicator or pattern predicts the future, and nothing here is investment advice.