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

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

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in the most correct way possible.

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

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difficult to do this successfully.

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

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

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depending on the historical value of
another.

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

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

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two standard deviations that establish
the upper and lower lines.

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

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

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

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

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

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

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

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lower one corresponding to the negative
deviation.

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

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

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action, just like the line drawing we
explained earlier.

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

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

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

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

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

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My recommendation here is to leave it at
closing prices.

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

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

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

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

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

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

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

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

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potential reverse trading opportunity.

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

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the prevailing market dynamic.

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

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

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

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dynamic that the market is following to
be broken.

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Anything other than that would
exponentially increase the risk of

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

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

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

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Correlation Coefficient.

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which shows us in numerical and
quantitative terms the degree of

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

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

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

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

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positive correlation, a value of
negative 1 indicates a perfectly

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correlation, and a value of 0 indicates
no correlation.

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

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

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very closely represents reality.

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

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

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the channel.

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

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

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

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

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the last limit.

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

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

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

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regression channel from the high to the
low.

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

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

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current one.

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

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endpoint of the bearish regression
channel.

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

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

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new high or low.

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Could we draw a channel between those
two points?

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

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

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

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

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better visualize the dynamic.

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

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

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

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high on a lower time frame would look
like.

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

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

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

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

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advance increasingly in line with the
bullish dynamic.

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Establishing this filter before reverse
trading is tremendously useful for our

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decision making.

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Let's continue with the example.

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

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to anchor a new bullish regression
channel to it.

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

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the end of the channel.

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But up to what point?

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

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

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

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

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

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we should see something like this.

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

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

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

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the high shown in the example.

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

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generating a new, well -channeled upward
movement.

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

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therefore use?

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

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

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

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by the market.

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

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bullish channel.

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

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

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

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there. And this is what would eventually
happen.

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

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

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

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

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

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

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

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

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

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

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

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

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Of course not.

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

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

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

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

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require from the market before assessing
a potential opportunity.

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

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continue to fall again after a while.

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We already know that anything is
possible in the market.

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

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dynamic versus the traditional way as
prescribed by the technical analysis

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approach.

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

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

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

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

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

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

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opposite direction if we so decide.

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

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been drawn.

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

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two highs to anchor the downtrend.

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

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

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slightest change in the market.

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

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following, The use of regression
channels is undoubtedly much more

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above all and fundamentally because it
is totally objective.