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The R-Squared or R2 is a statistical measure that shows the percentage of movements of one time-series that can be explained by movements of another time-series. The R-squared values range from 0 to 1 or 0 to 100 if expressed in percentage. A value of 100 indicates that all movements in one time-series or security are explained by movements by another time-series or security. A value of 0 indicates that that no movements in the first time-series can be explained by movements in the other time-series.
The R-Squared is simply the correlation between two time-series raised to the second power.
Chande & Kroll introduced, in their book 'The new Technical Trader', an indicator that uses the R2 tool. According to Chande & Kroll, the indicator is a lagging indicator that shows the strength of the trend and that the primary use of R2 is as a confirming indicator.
The indicator accepts one parameter, which is the number of periods (bars) used to calculate the correlation. The default value is 14. The time-series produced by this R2 indicator bounces between 0 and 1. You can multiply it by 100 to get a percentage value.
You can also use a moving average to smooth the result:
sma(chande_r2(14) * 100, 14);
In this example, I have used a moving average with a period of 14 bars and I have also multiplied the Chande & Kroll R2 indicator (chande_r2) by 100.
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
