Linear Regression Channel

A channel around the best-fit straight line through recent prices, with boundaries set by standard deviation.

Teaching sketch. It shows the shape, not a live quote and not a trade signal.

Formula

The middle line is the least-squares fit of price over the lookback. Upper and lower lines sit a chosen number of standard deviations away, often 2.

Definition

A linear regression channel replaces the hand-drawn trendline with a statistical fit. The centre is the line that minimises the squared distance to the closes over a window. The outer lines mark how far price has typically strayed from that fit. It is a description of the window you chose.

How it works

Change the lookback and the channel changes. A short window hugs price. A long window shows the broader slope and treats recent spikes as deviations. The standard-deviation width assumes the residuals are reasonably well behaved, which trends with gaps are not.

How traders use it

Traders use the outer bands as stretch markers: far above the fit, the move is extended relative to its own recent slope. A cross of the centre line shows price changing sides of the average slope. It does not predict the next slope.

Common mistakes

Treating the outer band as a reversal signal in a runaway trend. Regression follows. It does not lead. In a strong trend price can walk the band.

Limitations

The line is refit every bar as the window moves, so old boundaries shift. Do not remember a regression line as a fixed level the way you remember a horizontal high.

This note explains the term. A sketch shows the shape of the idea. Neither is a recommendation, a signal, or a comment on any security. Indicator settings and exchange conventions differ. Check the live chart and the contract specification before you use a number.