This is an introduction to the main features and capabilities of Price Action Lab (PAL). There are many ways of using this software and here only a partial list of its main features and capabilities is presented along with links to some articles about trading.
Simulations of a random system since SPY inception show that nearly 35% of random traders, human or automated, have made some profit. However, only 1% of random traders were lucky enough to exceed the buy and hold return with dividend reinvestment, estimated at 8.60%. Even at that significance level, the market is still overly generous compared to other recreational gambling systems and whoever prefers those over the market is ignorant of these important statistics.
This alert is about high probability position and day stock trades from the Dow-30 and S&P 100 indices. Position trades exit for a 2% profit target or stop-loss, whichever comes first. Day trades exit at the close of the same day. All trades are executed at the open. Portfolio backtests must be used to indicate which patterns have a persistent edge that implies a low, but still finite, probability that they are random.
The FTSE 100 and the German DAX are now in overbought territory according to classical technical analysis but those who rely on gambler’s fallacy to trade should pay attention to the fact that, historically, short positions in those and other markets based solely on overbought conditions have not been profitable.
Last Friday I warned about the possibility of a double bottom in GLD and that traders should not listen to either catastrophic or euphoric calls about gold or any other market because most of those who issue them are in the best case demonstrating their cognitive bias. The same people that ex ante were gold bulls, ex post they are gold bears. Obviously, such emotive approaches to the market get punished both sides.
Backtesting trading systems on historical data is again becoming popular almost 30 years after it started being used by individual traders due to recent advances in web technology and server speed that allows its online implementation. If one knows what backtesting is all about and its hidden assumptions and pitfalls then its use can be justified. But those who think they will find a trading system for 1-minute bars using backtesting will probably be fooled by randomness and they will only lose their money.
The 120-day correlation chart between EURUSD and S&P 500 index fell a few days ago to levels seen at the low of the market in March 2009, the only difference being that back then the market had fallen more than 50% and the positive correlation was helping the US dollar. Currently, the market is on a strong uptrend and a positive correlation of about the same magnitude is again helping the US dollar to rise. Why is this happening?
The Australian S&P/ASX 200 index has risen 11.44% this year, moving on an almost straight line to the middle of February but then volatility increased and little progress has been made. Since February 20 of this year this index has gained 2.3% and there are signs of a short-term top. The last two trading days of last week formed an inside day price pattern. This pattern is analyzed in this post along with a divergence between the RSI(14) and my MEI(14) indicator.
One may find scores of recent articles in the blogoshpere calling for a continuation of the gold downtrend after a pause and an extension of the stock rally to … you pick the future date, all are there. In reality, these analysts are conveying their cognitive biases to the public because unless one experiences precognition and knows the future the only reasonable assessment of the situation can be a subjective probability much less than 1. Current situations in GLD and SPY are discussed.
The Randomness Index was introduced yesterday in another post. The value of this indicator is calculated for any set period using the closing prices. Under normal conditions the indicator swings between +100 and -100 although values beyond those extremes are also possible. Values between +10 and -10 usually denote a random trading range but only when the indicator is on a downtrend or sideways motion.
