Introduction to the Linear Regression Moving Average Indicator
Most moving average lines tend to be too lagging and produce trade signals that are late. The Linear Regression Moving Average (LRMA) Indicator, otherwise called the Linear Regression Indicator or Moving Linear Regression Indicator, was designed to plot a highly sensitive moving average line which can respond to price action shifts and movements much quicker.
What is the Linear Regression Moving Average Indicator?
The LRMA Indicator is a moving average line which plots a highly responsive line compared to most moving average lines.
This version of the LRMA Indicator plots a line that changes color depending on the direction of the trend or momentum. It plots a green line to indicate a bullish momentum, a red line to indicate a bearish momentum, and a yellow line to indicate a possible trend or momentum reversal.
How the Linear Regression Moving Average Indicator Works?
The LRMA Indicator computes each candle or bar as the end point of an n number of period Liner Regression line. This is the reason why the LRMA Indicator plots a line that is very responsive to price movements.
This version of the LRMA Indicator changes the color of the line depending on the changes of the slope of the line. It plots a green line if the LRMA line is sloping up, and a red line if it is sloping down. It plots a yellow line if there are changes in the slope of the line which indicates that the prior trend is weakening or is about to reverse.
How to use the Linear Regression Moving Average Indicator for MT4
The LRMA Indicator has three variables which allow users to tweak and modify the LRMA line.
“Period” allows users to change the number of bars the indicator would calculate in determining the LRMA line.
“Price” refers to the price point used by the indicator in computing for the LRMA line, whether it is from the close, open, high, or low of each bar.
“Shift” allows users to move the LRMA line forward or back.
Given the highly responsive characteristics of the LRMA line, this indicator is best used as the faster moving average line component of a moving average crossover pair when trading a trend reversal or trend following strategy.
In the examples below, we will be using a 20-period Simple Moving Average (SMA) as the slower line paired with LRMA line.
Buy Trade Setup
When to Enter?
Open a buy order as soon as the LRMA line crosses above the slower moving average line. Set the stop loss below the moving average lines.
When to Exit?
Close the trade as soon as the LRMA line crosses below the slower moving average line.
Sell Trade Setup
When to Enter?
Open a sell order as soon as the LRMA line crosses below the slower moving average line. Set the stop loss above the moving average lines.
When to Exit?
Close the trade as soon as the LRMA line crosses above the slower moving average line.
Conclusion
Being a highly responsive moving average line, the LRMA allows traders to enter trades earlier and potentially earn higher profits on a winning trade. However, just as with most moving average lines that are highly reactive to price movements, the LRMA line also tends to be less effective when used in a choppy market condition. As such, it should not be traded blindly as a standalone trade signal. Instead, it should just be incorporated in a bigger picture trading strategy.
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