R-Squared Indicator

The R-Squared (R2) indicator measures how closely a data set fits to the linear regression trendline. Its values show the correlation between real data points (close prices) and corresponding linear regression trendline points when employed as a chart analysis. R-Squared is equivalent to the square of the Pearson correlation coefficient in mathematics. A simple moving average can be used to smooth the coefficient values for optimization reasons. R-Squared values range from 0.0 to 1.0; larger values imply a stronger connection, while values close to 0.0 suggest no association.

What is the R-Squared Indicator?

The R-Squared Indicator is a basic oscillator that notifies you when you are overbought or oversold. R-Squared is an oscillator that functions similarly to the RSI or Stochastics. This indicator is a member of the linear regression series. R-Squared is the correlation coefficient that determines the linear regression line’s quality. R-Squared gets its name from the computation – the value is the square of the correlation coefficient, which is prefixed with the Greek letter Rho (P) in mathematics. With two trend direction signal lines, the indicator oscillates between 0 and 101. The lines are long and smooth, with a comparable period. The indicator can be used on any timeframe by traders.

Setting up the R-Squared Indicator
Setting up the R-Squared Indicator

R-Squared Strategy

The indicator displays BUY and SELL indications when placed on the asset’s chart. Traders may identify oversold and overbought zones to determine the BUY and SELL signals. The R-Squared indicator, as previously stated, oscillates between 0 and 101. When the signal line approaches the 101 level, it signals that the market is overbought. Traders can enter short or exit long positions here. When the signal line approaches zero, it indicates an oversold condition, and traders can enter long or exit short positions.

Buy Signal

This could be your checklist for a buy trade:

  • When the indicator crosses the 0-level upwards from the oversold region.

Once this event occurs:

  • You could open a buy position after the bullish crossover happens and you confirm your entry with bullish candlestick patterns.
  • You could set your stop loss just below the nearest swing low.
  • You could set your take profit at the nearest resistance zone, or you could exit trade when the indicator crosses the 101-level downwards.
  • For good risk management, I would only consider trades with a risk to reward ratio of at least 1:2.
R-Squared Indicator Buy Setup
R-Squared Indicator Buy Setup

Sell Signal

This could be your checklist for a sell trade:

  • When the indicator crosses the 101-level downwards from the overbought region.

Once this event occurs:

  • You could open a sell position after the bearish crossover happens and you confirm your entry with bearish candlestick patterns.
  • You could set your stop loss just above the nearest swing high.
  • You could set your take profit at the nearest support zone, or you could exit trade when the indicator crosses the 0-level upwards.
  • For good risk management, I would only consider trades with a risk to reward ratio of at least 1:2.
R-Squared Indicator Sell Setup
R-Squared Indicator Sell Setup

R-Squared Pros & Cons

Pros

  • The R-Squared indicator informs the trader when price is in overbought or oversold regions.
  • The indicator assists the trader in determining the strength of the trend of the asset being traded.

Cons

  • The R-Squared indicator, due to its functionality, may not be very suitable for shorter timeframes.
  • When prices move sideways, the data is dispersed around the regression line.

Conclusion

The R-Squared Indicator is a momentum oscillator that indicates overbought and oversold conditions. Identifying these levels can suggest possible trade entries and exits for traders. Even though the indicator can function alone, it is ideal when combined with other indicators such as the MA or the RSI. This is due to the indicator’s proclivity for misleading indications. You can always practice trading on a forex demo account to begin with to improve your trading skills and build up your confidence.