The R-Squared indicator is a handy tool that helps traders gauge how closely a stock's prices correlate with its linear regression line. Values nearing 1.0 indicate a strong relationship, while those closer to 0.0 suggest a weak connection.
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When you're looking to determine if a trend is statistically significant for a specific period, plotting the R-Squared indicator is essential. Below, you'll find a table that outlines the critical R-Squared values needed for a 95% confidence level across various timeframes. If your R-Squared value falls below these critical thresholds, it may indicate that the prices are not showing a statistically significant trend.
Critical R-Squared Values for 95% Confidence
- 5 periods: 0.77
- 10 periods: 0.40
- 14 periods: 0.27
- 20 periods: 0.20
- 25 periods: 0.16
- 30 periods: 0.13
- 50 periods: 0.08
- 60 periods: 0.06
- 120 periods: 0.03
Keep in mind, if you see the R-Squared indicator reaching extreme levels, it might be worth considering a short-term position against the prevailing trend. For instance, if the slope is upward, and the R-Squared exceeds 0.80 but starts to decline, it could be a signal to sell or open a short position.
There are various strategies to leverage the outputs of R-Squared along with the slope in your trading systems. If you're looking for a deeper dive into these concepts, I recommend checking out "The New Technical Trader" by Tushar Chande and Stanley Kroll for more insights.
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