Overview of Regression Trend Channel (RTC) page 1

Elliott Wave Rules and Guidelines

Since the early days of technical analysis the use of a "trendline" has been an acceptable technique to help
define price support and/or resistance. One form of a trendline developed from higher level mathematics is
known as a "linear regression trendline.

A linear regression trendline is the straight line mathematical measurement of the relationship between
sets of price data that plot out as a trendline.

In many ways it is similar to a moving average. The difference is there is no lagging the linear regression
trendline and, secondly, it is helpful because it often identifies a change in trend quicker than a moving
average.

According to theory, prices can vacillate above and below the regression trendline and still the overall
trend is maintained. By using the Regression Trend Channel (RTC) you can better identify that outer range of
that overall trend pattern.

A Regression Trend Channel (RTC) is simply the mathematically standard deviation of the linear regression
price data. It is calculated using the actual prices of the bars in the trend. The idea is to draw an upper and
lower channel from the linear regression line by using the standard deviation of the prices. The break of a
Regression Trend Channel is usually used as an entry or exit signal.
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The RTC is similar to Bollinger Bands which draw bands using standard deviations of a moving average.
However, instead of using a moving average, by using the RTC tool, Advanced GET is simply allowing you to
use the linear regression line of a swing you identify. (In case you where wondering, the Advanced GET RTC
uses the data bar midpoint for its calculation.)

Find the Regression Trend Channel (RTC) in the Advanced GET studies selection or highlight the RTC icon.
To activate the RTC default menu, click your right mouse button.
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The Advanced GET defaults the trendline source to "High-Low flip." The H-L flip indicates that the
Automatic Trend Channels should be calculated using the Low of the bars when the trend is up, and the High
of the bars when the trend is down. Our studies indicate the H-L flip generates the best regression trendline.
You can change to a different calculation method if you have a different preference.

The program also defaults with the Standard Deviation turned "On" for the Upper and Lower Channel. With
the standard deviations checked off you will no longer have a regression trend channel, but you could use this
tool as a channeling technique. We prefer the standard deviation to be turned "On."

The "End Bar" is a useful selection in the RTC menu that allows you to have a visual reference or reminder
of where the ending calculation is on the RTC. For example, say you are calculating the early stages of a new
sequence using the RTC tool. By turning "On" the "end bar" you will see a vertical line in that RTC. You also
have the option to change this identification point to any color you select. Later, if you want to recalculate a
new RTC based on current action, you now will have a reminder of where those RTC's calculations were taken
from. This is also a useful feature when you are using multiple Regression Trend Channel lines when
interpreting price action.

The "Pearson's R" On/Off button indicates if the Pearson's value will be shown at the end of the Regression
Trend Channel. Showing Pearson's value helps identify the "slope" in the price movement.

As the Pearson's R value gets closer to the value of 1, the calculated trend line is matching the actual
value of the data. In most instances a very high Pearson's value will be identifying the desirable "single slope"
price movement we should be monitoring for as Advanced GET users. This means that the regression line is
"fitting" the trend very well. As the Pearson's R value gets closer to the value of 0, the trend line is doing a
poor job at matching the data action. This means that the regression line does not "fit" the trend very well.
However, a low Pearson's may still be useful if you want to help identify the potential outer ranges of price
movements in a non-trending market, or wider swing movements. Think of the "Pearson's R" value as a
percentage-- a 0.900 (90 percent) match is a good fit; while a 0.060 (6 percent) match is very poor.
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If you use the RTC enough you tend not to use the Pearson's feature because they can help clutter a
screen and you can pretty much guess at the "fit" when you see them enough times.

The most effective use of the Regression Trend Channel (RTC) would be when a "single sloped" market is
identified (in simple terms: when a market that is moving in a very linear manner) to begin to apply the RTC
for a potential breakout pattern. The use of Pearson's helps identify that linear relationship. If a market is
"curve fitting" well-- some would say a Pearson's value of 0.90 to 0.93, or greater, is what you want to see for
a "tight fit"-- you can now begin to setup for a trade opportunity of the break of channel line in that tight fit.

As Advanced GET users we want to be monitoring for Elliott Wave Type One and Two Buy or Sell trading
opportunities. The question to ask: "Is the Type One or Two pattern moving in a straight line advance or
decline, or not?" If it is, use the RTC to help confirm the trade opportunity. If the price is not moving in a
single slope, then use the 6/4 DMA's to confirm the trade setup.

In a Type One setup the RTC calculation begins at the end of a major Wave Three and should end at the
current major Wave Four. In a Type Two setup you want to focus your calculation on the major Wave Four to
the current high.
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It is important to remember you will always increase the probability of success for your trading opportunity
when you combine the use of the RTC with other Advanced GET tools, such as the Oscillators, MOB, Ellipse,
XTL, and so forth.

Before ending, let me share with you a few experimental ideas you may want to try on new uses of the
Regression Trend Channel tool in Advanced GET:

(1.) When you see a Type One or Two setup where you are using a Regression Trend Channel, try re-
issuing that chart to a lower time frame to better frame up the trade opportunity. For example, take a look at
again at the Disney Type One buy opportunity setup on the Daily chart. Now, either issue to a new Hourly
chart, or re-issue the Daily to an Hourly and calculate a new RTC from this new time frame. By applying this
cross-referencing technique you may be better able to identify a breakout entry point more quickly, one which
has improved risk/reward parameters.
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(2.) If you have a market that has been trending in strong or down sequence-- what some might call a
"momentum" play-- try taking your RTC and calculate from the beginning to the current end. You may be
able to use the RTC-- in conjunction with a MOB, Ellipse, Elliott Oscillator, XTL, the 6/4 DMA's, and Advanced
GET other tools-- to help stay with a winning trade and help identify either that sequence's break point area or
the next possible good risk/reward trend setup. When you look at the July '00 Daily Corn chart you could
have easily identified a trading Short opportunity and combined tools with the RTC to stay Short from early in
that breakdown sequence.

(3.) There are times when you might want to combine the RTC and 6/4 DMA's to gain a better handle on price
movement, even if the price is moving in a single sloped direction. If the trend direction is to continue, one
tool might get broken, but not both. While you should still only take a signal off one tool, the other can help
confirm. Again, looking at the recent July '00 Daily Corn chart helps illustrate this idea. Using both the RTC
and 6/4 DMA would have given you greater confidence in staying with the downtrend. The key is not to use
both tools when they begin to clutter your screen and reduce your ability to act quickly breaks do not occur.

(4.) When you have a clearly defined RTC-- preferably with a single slope-- and you are not trading the
swings within the channel, why not turn "Off" everything accept the breakout Regression Trend Channel line?
By so doing this the screen becomes less cluttered and is now made more useful for other analysis with other
tools. For example, if you are in an uptrend, go to the RTC menu and turn off everything but the Lower
Channel setting, using a break as a signal to either lock in profits, or reevaluate a position. Do the same thing
with a downtrend, turning off all but the Upper Channel setting.
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(5.) Finally, before ending, let me share with you an experimental RTC tool technique I am using now to help
me refine my risk/reward entries. It seems to be reaping good results.

A while back I became to recognize a reoccurring pattern when using the Regression Trend Channel as an
entry tool. Often there will be "spikes" where the price trades outside the channel, only to pull back within the
channel formation, continuing in the overall trend direction. I started experimenting with the standard
deviation selection in the RTC menu, and after a while I found out I could actually "tweak" the settings and
take advantage of these "spikes." While experimenting with the standard deviation setting that would now
include those "spikes," then what would subsequently be spikes later on in that sequence were now contained
in the RTC. The caveat rule I developed in this new technique is this: if it is an uptrend, I only adjust the
upper channel, never the lower channel. If it is a downtrend, I will adjust only the downtrend channel, never
the upper channel. The breakout signals remain the same, but the spikes are now included in the total
pattern. The adjusted channel would now serve as a better visual guide when placing a stop loss on a trade.

In addition to this RTC adjusting technique, I first use the other tools and techniques available within
Advanced GET to help better define the trading opportunity setup, but now I can better use the RTC-- in many
instances-- to help me better guess an entry and stop placement, which has always been one of my
weaknesses. Whether you believe this or not, it does seem to really help me with difficult stop placements
and I will be continuing to search for improvements in this technique.

To better understand this idea, look at the September '99 Daily Lumber contract illustration.

Lumber was in an uptrend at the time. It stayed contained in the Regression Trend Channel until late June
of '99, then "spiked" through only to fade back into the channel. After adjusting the Upper Channel value in
the Regression Trend Channel menu I was able to find a setting that now included that "spiking" action. I
used that setting. Whatever my reason for going short at the time I cannot now clearly remember, but I did
use just the adjusted RTC and a MOB and was better able to define a safer, more manageable risk/reward
that worked out well.
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Again, this is only a technique I am playing with, but it seems to be working well. The use of the
Regression Trend Channel (RTC) in Advanced GET has become one of many unique tools available within the
program that has improved my own personal performance. If you are not currently using Regression Trend
Channels in your analysis, you are missing a powerful tool in your trading arsenal.