Using regression can allow you to implement a trading and investing style that is based on reversion of the mean. If you are unfamiliar with standard deviation, head over to that informational section of the site and become familiar, as this will make more sense after. Simple regression will allow you to identify when an equity is far from the mean, standard deviation wise, giving you an idea of when the stock may revert back to the mean.
Some of the perks of using this particular data set is that it will eliminate the human element, giving you statistical data that is concrete and certain. Keeping emotion out of trading is one way to potentially give yourself an edge. Another perk is that this type of investing and trading will hopefully give you an edge in trend trading, allowing you to spot when the market is slightly over bought or over sold.
However, with any trading tool there are negatives to keep in mind. First, you have to understand that there will always be a human element to trading and investing, and by eliminating all of it, it could hurt your data outcomes. Find the happy medium and tweak it to what will fit your trading style best. Secondly, mean reversion does not always work, just with an trading style, so using a simple regression mind set could prove to be unprofitable.
With any trading idea, you should throw it on a demo account and find out if it is exactly what you are a looking for. Tweak time frames and other limitations to have it fit your current needs. If you get stuck, reach out to an investing community and they can certainly help you fine tune your charts. Once you feel comfortable, take it step further and integrate it with other tools to see if you can find a edge to increase your returns. Again, this is a great data set to use with mean reversion and is worth your time if you believe in that market philosophy.
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Nathan Young is a Senior Member of Macroaxis Editorial Board - US Equity Analysis. With years of experience in the financial sector, Nathan brings a diverse base of knowledge. Specifically, he has in-depth understanding of application of technical and fundamental analysis across different equity instruments. Utilizing SEC filings and technical indicators, Nathan provides a reputable analysis of companies trading in the United States.
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