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David,
I will give it a try, at least how I see it. You should really go to a
library to find a book on Basic Statistics. I have found that at least a
basic grasp of statistics is essential to technical analysis so you can
accurately judge if one indicator or system is really "better" than another,
and by how much. It also speeds the development of an indicator since you
will have a grasp of what is really being measured and can zero in on a
specific path for improvement for an indicator, rather than blindly plugging
numbers into an equation and wasting your time.
Imagine standing at the beach and watching the waves roll in. You find a
nice flat board 13 feet (periods) long, and throw it lengthwise into the
surf so the ends of the board extend from one wave crest to the next. The
ends of the board will slightly sink into the wave crests while the middle
of the board will rise slightly above the trough between the crests. The
board is trying to find a true sort of average of the level of the ocean as
it sees it from its 13 foot (period) world.
If the height and shape of both waves are the same, the surface of the board
will be level. Obviously, if one wave crest is higher or broader than the
other, that end of the board will be higher than the other. The board will
be sloped from horizontal.
If we had attached a felt-tip pen to one end of the board and let it mark
the motion of the end of the board onto some paper (yeah, waterproof), we
would see the result of the movement of the end of the board as waves moved
under it. Although linear regression uses a straight line to form our board,
MetaStock graphs the line that would result from the end of that board as it
moves over the crests and troughs of the close of prices. If we had thrown a
shorter board into the surf, it would pitch up and down and show a larger
range of slope changes than the longer board. The pen attached to the
shorter board will also more closely graph the shape of the waves. The
analogy of the difference between a small boat and a supertanker in a storm
could also be used.
If the foregoing has completely confused you, just do the following:
1. Open a chart of prices and double-click directly on the prices to change
the price style to line.
2. Go to Insert, and line studies, and draw a 13 period linear regression
line onto the prices anywhere on the graph.
3. Go to Indicator Quicklist and select Linear Regression Indicator. Put a
13 period indicator onto the prices.
4. Click directly on the 13 period line study bar that you drew in #2, and
holding down the left mouse button, slide it left and right over the prices.
5. Cool, eh? Notice that the right end of the linear regression line study
bar perfectly traces out the line that was graphed by the 13 period Linear
Regression Indicator from the Quicklist.
6. Get back to the beach and offer a cold one to that gorgeous blonde that
helped you find the boards.
-Corey Saxe
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