Linear Regression Oscillator

The Linear Regression Oscillator indicator provides insights into potential mean reversion and trend conditions by calculating a normalized linear regression of closing prices.

Usage

The indicator can be used to identify trend shifts and potential reversal points in the market.

• Trend Identification: When the oscillator crosses above the zero line, it indicates a bullish trend shift, marked by a green diamond on the zero line and an upward arrow on the price chart. Conversely, a cross below zero suggests a bearish trend shift, marked by a red diamond and a downward arrow.
• Mean Reversion Signals: The tool identifies overbought and oversold conditions when the oscillator exceeds the user-defined thresholds. A "Reversion" label appears on the chart when the oscillator begins to pull back from these extreme levels toward the mean.
• Invalidation Levels: When a trend shift occurs (zero-cross), the indicator plots an "Invalidation Level" based on recent price extremes. If price breaks this level, the current trend signal is considered invalid.
• Bar Coloring: Users can enable the "Plot Bar Color" setting to highlight the price bars based on the oscillator's position relative to the zero line, aiding in trend visualization.

Details

The script calculates the linear regression (slope and intercept) of prices over a specified lookback period. The resulting values are then normalized using a Simple Moving Average (SMA) and Standard Deviation to create an oscillator that fluctuates around a zero line. This normalization allows for more consistent interpretation of overbought and oversold thresholds across different assets and timeframes.

Settings

• Length: Determines the lookback period for the linear regression calculation.
• Upper Threshold: Sets the level for identifying overbought conditions (default is 1.5).
• Lower Threshold: Sets the level for identifying oversold conditions (default is -1.5).
• Plot Bar Color: Toggle to enable or disable the coloring of price bars based on the oscillator state.

FAQ

How do I use the Invalidation Levels?

Invalidation levels represent recent highs or lows at the time of a trend change. They can be used as trailing stop-loss levels or as points where a trade thesis is no longer valid.

What do the different shapes on the oscillator mean?

Solid diamonds (◆) indicate a zero-line crossover (trend change), while hollow diamonds (◇) indicate a mean reversion signal from the upper or lower thresholds.

How can I access this indicator?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.