Line of Best Fit
Candlefocus EditorA line of best fit is typically a straight line. It is drawn by plotting the points on a graph and attempting to minimize the distance between the points and the line itself. This is done by finding the slope of the line, derivatives, and adjusting the line until a minimum distance point is reached. The mathematical coefficients of the line can be used to estimate the value of the dependent variable given a certain value of the predictor variable.
In finance, the line of best fit is used when examining correlations between indicators or price movements. For example, if stock returns move in similar directions over a certain period, a line of best fit can be used to indicate this correlation. The coefficients or parameters calculated from the line can then be used to monitor the performance of the indicator, or to gauge if trading volume or some other factor is having an effect on the returns.
In summary, a line of best fit is a tool used to describe relationships between different variables. It is an output of regression analysis and is used to draw a line that best fits the data points. In finance, it helps identify trends or correlations in market returns and the parameters of the line can be used to monitor the performance of assets.