The PRC (Polynomial Regression Channel) is a regression indicator that draws a line to fit best on the chart. It applies a polynomial function to linear regression function (three-line technical indicator used for analyzing upper and lower band limits of the trend) through recent period’s data. That’s why it is also called the Linear Regression Channel. As the Polynomial Regression Channel is a regression band, it adjusts itself for volatility.
What is the Polynomial Regression Channel?
The Polynomial Regression Channel uses bands to identity trends on the chart. It uses a polynomial degree (1-6) and a number of bars to analyze data.
Bands are present above and below the regression line between multiples of standard deviation. The regression line must form a parabola. If it forms a straight line, the Polynomial Regression Channel won’t work.
The polynomial regression is a term in statistics representing the relationship between the independent variable x and the dependent variable y. It creates a polynomial function on the chart to display the set of data points.
The basic polynomial function is represented as f (x) = c0 + c1 x + c2 x2 ⋯ cn xn
Where n is the degree of a polynomial, and c is a set of coefficients.
The Polynomial Regression Channel uses n=1 to show a set of data points with the low error value. But a linear regression line can’t appear with the low error value.
So, the Polynomial Regression Channel uses the value of n is 2 or 3 to form the parabola. When these values are entered, a trader can create trading zones.
How to use the Polynomial Regression Channel?
As we mentioned, the Polynomial Regression Channel uses a degree of polynomial to display data points. This creates boundaries around the price. Here the support and resistance come into play from the bears and the bulls.
The bullish trend appears when the price is increasing, and the slope of the regression line is positive. This is known as a bullish regression channel.
The bearish trend appears when there is a decrease in price, and the slope of the regression line is negative. This is known as the bearish regression channel.
With the Polynomial Regression Channel, you have the upper band, the lower band, and the neutral band. The neutral band is present in the middle.
To trade on the Polynomial Regression Channel, we need to keep an eye when the price interacts with one of these bands.
Each time the price hits the upper band or the lower band, this can be a signal to buy or sell. The bands adjust themselves depending on the uptrend and the downtrend.
You can choose your own settings for the indicator or author’s settings.
Polynomial Regression Channel Strategy
The basic strategy for Polynomial Regression Channel is to buy when the price is in the lower band and sell when the price is in the upper band. The trader may choose to exit when the price is in the middle band.
By using Polynomial Regression Channel in a trading strategy, traders can try to detect the trend’s direction. For example, when the price hits the upper band, this sometimes indicates the market is in a downtrend.
Polynomial Regression Channel buy strategy
- The price should enter the lower band region.
- Wait for the price to close bullish before entering.
- Place the stop-loss near the swing low area.
- Exit the trade when CCI is above 50.
Polynomial Regression Channel sell strategy
- The price should enter the upper band region.
- Wait for the price to close bullish before entry.
- Place the stop-loss near the swing low area.
- Exit the trade when CCI is below 50.
Polynomial Regression Channel Conclusion
Polynomial Regression Channel can be a useful trading tool for identifying a major trend in the market. You can apply it on any timeframe, and it will calculate on your defined timeframe.
I would prefer to use the majority of technical indicators such as the Polynomial Regression Channel on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.
The Polynomial Regression Channel is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the Polynomial Regression Channel into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Polynomial Regression Channel, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.