Forex Linear Regression Lesson

Understanding Linear Regression in Forex Trading

Linear regression is a statistical tool used in forex trading to analyze price trends and forecast future movements. By fitting a straight line to historical price data, traders can identify the direction and strength of a trend, helping them decide when to enter or exit trades.

Key Concepts

• Slope: Indicates the trend direction (positive = uptrend, negative = downtrend).
• Intercept: The point where the regression line crosses the y-axis.
• R² Value: Measures how well the line fits the data (closer to 1 = better fit).
• Application: Used in indicators like Linear Regression Channel or Slope.

Example in MQL4

double LinearRegressionSlope(double &prices[], int period)
{
   double sumX = 0, sumY = 0, sumXY = 0, sumX2 = 0;
   int i;

   // Calculate sums for linear regression
   for(i = 0; i < period; i++)
   {
      sumX += i;
      sumY += prices[i];
      sumXY += i * prices[i];
      sumX2 += i * i;
   }

   // Calculate slope (m) using the formula: m = (n∑xy - ∑x∑y) / (n∑x² - (∑x)²)
   double n = period;
   double slope = (n * sumXY - sumX * sumY) / (n * sumX2 - sumX * sumX);
   return slope;
}

void OnStart()
{
   double prices[10] = {1.2000, 1.2010, 1.2025, 1.2030, 1.2045, 1.2050, 1.2060, 1.2075, 1.2080, 1.2090};
   double slope = LinearRegressionSlope(prices, 10);
   Print("Linear Regression Slope: ", DoubleToString(slope, 5)); // Example output: 0.00100
}
            

Explanation

1. Data: An array of prices (e.g., EUR/USD closing prices) over a period.
2. Calculation: The LinearRegressionSlope function computes the slope using the least squares method.
3. Result: A positive slope (e.g., 0.00100) indicates an uptrend, while a negative slope indicates a downtrend.
4. Trading Use: A trader might buy if the slope is positive and above a threshold, or sell if negative.

Practical Application

In MetaTrader 4, you can integrate this into an indicator or expert advisor. For example, plot the regression line on a chart or use the slope to trigger automated trades. Test this code in MetaEditor to see the slope value in the Experts tab.