1 © Kozminski University Investment Club “Kapitalni” Modelling the alternative support and resistance levels with the application of the linear regression Wojciech Jakub Podobas Kozminski University Investment Club “Kapitalni” info@tradingalgorithms.pl 1. Abstract The aim of the article is to model a new formula that can calculate price corridor using the linear regression and standard deviation instead of the moving average. The research will check the possible application of the linear regression into the place of the standard moving average. The application of the linear regression instead of moving average and Bollinger Bands could give a better and closer estimated data about price trend, due to the mathematical nature of the linear regression that uses squares from variables instead of the normal arithmetical mean. The application of the linear regression could create a good analytical background for investors to omit jigsaws, bear and bull traps. Research question: How does the linear regression could improve predicting the price movement in the foreign exchange market? 2. Introduction and the background information To understand properly the content of the work few concepts need to be implemented. Key definitions Financial instrument- Every asset that could be traded at the stock exchange 1 EUR/USD- currency pair comparing price of Euro [EUR] to American Dollar [USD] 2 Technical analysis- financial mathematics branch defining the price movement at the stock exchange Price trend- the main direction where the price of a financial instrument is going 3 Moving average- the trend following technical analysis tool, the continuously changing mean of the price of the financial instrument in the fixed number of time, for example MA20 relates to the average price of the financial instrument in last 20 days 4 1 Reuters-Report. (2001). Foreign currency market. New York: Reuters print. p.227 2 Ibid., p.229 3 Archelis S. (1998). Technical analysis from A to Z. New York: Irwin. p. 72 4 Ibid., p. 15