Breakdown of the Leading Indicator: Linear Regression (LRC):
A linear regression line is used to estimate the current trend direction. When the price is above or below the regression line, it indicates whether the price is deviating from its mean, signaling potential reversals. Rate of Change (ROC):
ROC measures the momentum of the price over a set period. By using thresholds (positive or negative), we predict that the price will continue in the same direction if momentum is strong enough. Leading Indicator Calculation:
We calculate the difference between the price and the linear regression line. This is normalized using the standard deviation of price over the same period, giving us a leading signal based on price divergence from the mean trend. The leading indicator is used to forecast changes in price behavior by identifying when the price is either stretched too far from the mean (indicating a potential reversal) or showing strong momentum in a particular direction (predicting trend continuation). Buy and Sell Signals:
Buy Signal: Generated when ROC is above a threshold and the leading indicator shows the price is above the regression line. Sell Signal: Generated when ROC is below a negative threshold and the leading indicator shows the price is below the regression line. Visual Representation:
The indicator oscillates around zero. Values above zero signal potential upward price movements, while values below zero signal potential downward movements. Background colors highlight potential buy (green) and sell (red) areas based on our conditions. How It Works as a Leading Indicator: This indicator attempts to predict price movements before they happen by combining the trend (via linear regression) and momentum (via ROC). When the price significantly diverges from the trendline and momentum supports a continuation, it signals a potential entry point (either buy or sell). It is leading in that it anticipates price movement before it becomes fully apparent in the market. Next Steps: You can adjust the length of the linear regression and ROC to fine-tune the indicator’s sensitivity to your trading style. This can be combined with other indicators or used as part of a larger strategy
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