Investing & Trading

R-Squared Study

By Samantha Baltodano


TL;DR:

The R-Squared (R2) is a technical indicator used by traders to determine the correlation between real data points and a linear regression trendline. It ranges from 0.0 to 1.0, with higher values indicating a stronger correlation. 


The R-Squared indicator measures how well the price movements of an asset fit a straight line, comparing actual price movements with predicted movements. High R-Squared values suggest a strong trend and potential trade opportunities, while low values suggest no trend and caution for traders.


You can access this indicator here.


What Is The R-Squared Study?

The R-Squared (R2) is a technical indicator that helps traders determine how closely a data set fits a linear regression trendline. 


This tool measures the correlation between real data points, such as close prices, and the corresponding points on a linear regression trendline. 


The R-Squared values range from 0.0 to 1.0, with higher values indicating a stronger correlation between the data set and the trendline. Conversely, values close to 0.0 suggest a lack of correlation.


How the R-Squared Indicator Works

The R-Squared indicator measures how well the price movements of an asset fit a straight line. A straight line represents a linear regression trendline that is created by finding the best fit through a series of price data points.


The R-Squared indicator compares the actual price movements of the asset with the price movements predicted by the linear regression trendline. 


The closer the actual price movements are to the predicted movements, the higher the R-Squared value will be. Conversely, the farther away the actual price movements are from the predicted movements, the lower the R-Squared value will be.


Trade Signals Generated by the R-Squared Indicator

The R-Squared indicator generates trade signals based on its values.


A high R-Squared value indicates a strong correlation between the price movements of the security and the linear regression trendline. This suggests that the asset is in a trend, and the trader may want to consider taking a position in the direction of the trend.


Conversely, a low R-Squared value suggests that there is no trend in the security's price movements, and the trader may want to consider staying out of the market or taking a contrarian position.


It is important to note that the R-Squared indicator is not foolproof, and traders should use it in conjunction with other tools and strategies to make informed trading decisions.


Test The R-Squared Study

Great news! 


You can back test this exact strategy on historical data for any of your favorite symbols using TradingView. 


This strategy has already been built and all you have to do is log in and take it for a spin. You can access this indicator here.


Interested in testing more R-Squared strategies? Check out these other variations here.


If you’re new to back testing and to TradingView, don’t worry. I created a step-by-step guide you can follow to begin testing the R-Squared Study.


Summary

  • R-Squared (R2) is a technical indicator that measures the correlation between real data points and a linear regression trendline.
  • R-Squared values range from 0.0 to 1.0, with higher values indicating a stronger correlation.
  • The indicator measures how well the price movements of an asset fit a straight line by comparing actual price movements with predicted movements.
  • High R-Squared values suggest a strong trend, while low values suggest no trend and caution for traders.
  • Traders should use the R-Squared indicator in combination with other tools and strategies to make informed trading decisions.


R-Squared is just one of many studies that Archaide automates. For a full list of strategies and studies available click here.


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