Original subtitles

Drawing Trend Lines 2 .0 In line with the previous point, as we have

it is very important that we draw the lines that will identify the price

in the most correct way possible.

Many traders, especially the less experienced ones, may sometimes find it

difficult to do this successfully.

One tool that can help us is the linear regression channel.

Linear regression is a statistical concept that tries to predict a variable

depending on the historical value of another.

The linear regression channel is made up of three lines. The central one, which

is the trend regression line created according to the least squares method,

two standard deviations that establish the upper and lower lines.

The TradingView platform offers this tool in the second menu of the panel

located on the left, where the trend lines are located, and just at the

of this option drop -down. The way to properly plot this type of regression

channel is to identify the high and low of a full movement or swing, and anchor

the trend line that is generated by clicking on the tool between these

As we can see on the screen, two trend lines will automatically be generated,

upper one corresponding to the positive deviation of the regression line and a

lower one corresponding to the negative deviation.

If we double -click on these lines, we can change their configuration.

The key to these regression channels is that they must include most of the price

action, just like the line drawing we explained earlier.

and to ensure this, we can change the configuration of the parameters.

I personally recommend using a setting between 1 .5 and 1 .75 plus or minus.

In the examples we'll be looking at, the deviation is set to 1 .5 and negative 1

.5 as it seems to me to adequately cover about 95 % of the price action.

Regarding the source, this refers to the prices that you will use.

My recommendation here is to leave it at closing prices.

to avoid the variability that other types of prices can produce due to their

constant change in real time in the style tab of the tool configuration

you can change the color this also allows you to extend the future lines to

infinity so that you can check in real time if the market continues to respect

the dynamic keep in mind that regarding the drawing of lines beyond using them

to provide us with potential trading zones for consideration which we will

about later Another main use is to determine the end of the directional

the short term as an input to begin to predict a possible market reversal and a

potential reverse trading opportunity.

In other words, we already know that we always want to trade in the direction of

the prevailing market dynamic.

In this case, if the market is falling, we are only going to look for short

trades, and in the event we are looking for a possible purchase operation

because we expect a bullish turn, we should at least wait for the bearish

dynamic that the market is following to be broken.

Anything other than that would exponentially increase the risk of

we would be entering against the direction in which the market is

unbalanced. This is the minimum key sign that we should expect to see.

This style tab also allows us to access other information, such as the Pearson

Correlation Coefficient.

which shows us in numerical and quantitative terms the degree of

that exists between the two variables, which we know are the start and end

prices to which we have anchored the channel in this case.

This coefficient varies between negative 1 and 1 and reflects the degree of

association between two variables, where a value of 1 indicates a perfectly

positive correlation, a value of negative 1 indicates a perfectly

correlation, and a value of 0 indicates no correlation.

For this example, if we look closely, we can see that the degree of correlation

is 0 .88, very close to 1, which suggests that the channel drawn on the

very closely represents reality.

The way to create and manage the drawing of these regression channels is simple.

First of all, we are going to talk about how to define the initial outline of

the channel.

Later, we will address the most logical way to modify said outline.

For the initial creation of the linear regression channel, we are going to

use the concept of pivot generation, through which we objectively determine

creation of a pivot when the market develops two candlesticks above and

the last limit.

As soon as we confirm the appearance of a pivot, we can begin to draw a

regression channel on it and in the direction of the subsequent movement.

Let's imagine that we are currently on the chart and that we have launched a

regression channel from the high to the low.

At what point are we going to modify the endpoint of the channel?

Well, right at the point when the price hits a low that is lower than the

current one.

At that precise moment, when the price develops a new low, we must change the

endpoint of the bearish regression channel.

This is the rule that we should always use for modifying the length of the

channel. We should maintain the same start and end point until the price hits

new high or low.

Could we draw a channel between those two points?

Absolutely. At this moment, we have the maximum pivot point confirmed.

So if you are looking for a potential entry to sell right in that zone, an

essential filter would be seeing the break in that bullish dynamic.

To do this, what I recommend here is going down to a shorter time frame to

better visualize the dynamic.

This is because if we establish the start and end in the same time frame,

channel will be too narrow and we won't be able to draw any clear conclusions.

There, we see what the bullish regression channel created from the low

high on a lower time frame would look like.

As we can see, it enables us to very precisely identify the edges of the

channel, so we can definitely use this to our advantage.

Often, this movement, which we would treat in principle as simply a bullish

correction, will not actually be a correction, but will instead continue to

advance increasingly in line with the bullish dynamic.

Establishing this filter before reverse trading is tremendously useful for our

decision making.

Let's continue with the example.

Once the price has developed that lowest pivot point, we can start to use this

to anchor a new bullish regression channel to it.

As the price develops, it hits a maximum pivot point, so we use this to anchor

the end of the channel.

But up to what point?

Until the market hits a new high, as in the example.

After that point, we will wait once more for the price to hit a new maximum

pivot point on which to anchor the end of the bullish channel.

The market continues to move, zigzagging back and forth constantly.

If we continue with this type of line drawing using the linear regression

we should see something like this.

Let's now look at another important factor that can emerge in the market.

Imagine we are at this moment, on the last candlestick on the chart.

At this point, we are seeing a major bullish movement from the last major low

the high shown in the example.

But as we can see, the price broke out at the bottom and then reversed again.

generating a new, well -channeled upward movement.

Which of the two regression channels should we consider to be more accurate

therefore use?

Well, as we discussed with respect to the traditional drawing of lines, it

should be the market that tells us which of them best defines the current market

context. Since both of them are currently in force, it will have to be

by the market.

The key here is to be clear at what point we need to mark a new end of the

bullish channel.

And as we know, this will be when the breakout of the last high occurs.

If the price rises above that high, we will wait for the generation of a new

maximum pivot point and we will mark the end of the bullish regression channel

there. And this is what would eventually happen.

Once the price breaks that last high, we can discard the previous short -term

dynamic and look at the entire movement as one at the aggregate level.

As we see, by including all of the latest price action, the slope of the

flattens out to adjust for all the fluctuations that took place from the

We already know that trends can continually change phases and go from

more or less steep slope to another context with a different representation.

What this method means is that we are relying on statistical approaches that

use objectively, and this adds greater validity to our analysis.

In case you're curious, The price in the example is that of the SP500 futures

market, and this is the current context where it appears to have broken the

bearish structural dynamic that it had been following in recent months.

Does this mean that it is definitely going to return to a bullish path?

Of course not.

The fact that the bearish structure has broken upwards does not mean that in the

medium or long term, the market will hit new all -time highs.

This fact simply informs us that in the short term, control seems to be on the

buyer's side. And this sign should be the minimum input that we are going to

require from the market before assessing a potential opportunity.

Even if that happens, we cannot rule out the possibility that the price may

continue to fall again after a while.

We already know that anything is possible in the market.

We are now going to compare this way of drawing lines to identify the market

dynamic versus the traditional way as prescribed by the technical analysis

approach.

For the purpose of what we are trying to achieve by drawing lines the

traditional way, which looks at the precise point of contact in millimetric

detail, does not offer us the same degree of confidence.

As previously mentioned, one of our main goals when drawing trend lines is to

identify the current market trend and to know as soon as possible when there has

been a change in said dynamic, so we can start looking for opportunities in the

opposite direction if we so decide.

Take a look at the difference between the different ways in which the lines

been drawn.

As every manual tells us, we have used the two lows to initiate the uptrend and

two highs to anchor the downtrend.

Were we to rely on these to identify the end of the trend, we would be too late.

On the other hand, if we use linear regression, we can quickly adapt to the

slightest change in the market.

Since what we are interested in identifying is the dynamic that the

following, The use of regression channels is undoubtedly much more

above all and fundamentally because it is totally objective.