As of the close of Tuesday, April 19, 2011, an inside day pattern formed in SPY daily chart. An inside day formation occurs when the range of a bar falls within the range of the previous bar. The inside day pattern can be seen on the chart below:
Inside day patterns often turn out to be important signals of future direction in the sense of traditional technical analysis. However, there are many variations of such patterns depending on price action that traditional analysis does not consider. Price Action Lab identified two such variations for different profit target and stop-loss objectives that were historically profitable:
In the screenshot above, P is the win rate, P1 is the 1-Bar win rate, Trades is the number of historical trades, CL is the maximum number of consecutive losers and Target and Stop the values of the profit target and stop-loss. C indicates the type of target and stop-loss, in this case it is a percentage added to the entry price, shown under Trade On as the open of next bar.
The first pattern is an inside day where the close of the current bar and the open and close of the previous bar are also taken into consideration. Specifically, for this first variation of the pattern, the open of the previous bar is greater than its close. Then, the close of the current bar is higher than the open of the previous bar. This is the pseudo code that was generated by Price Action Lab:
OPEN OF 1 BARS AGO > CLOSE OF 1 BARS AGO
AND CLOSE OF 0 BARS AGO > OPEN OF 1 BARS AGO
AND CLOSE OF 1 BARS AGO > LOW OF 0 BARS AGO
AND HIGH OF 1 BARS AGO > HIGH OF 0 BARS AGO
AND HIGH OF 0 BARS AGO > CLOSE OF 0 BARS AGO
AND LOW OF 0 BARS AGO > LOW OF 1 BARS AGO
The second variation of the pattern is an inside day where the open and close of the current bar and the open of the previous bar are taken into consideration. In this case, the close of the current bar is greater than its open and both are greater than the open of the previous bar. This is the pseudo code that was generated by Price Action Lab:
OPEN OF 0 BARS AGO > OPEN OF 1 BARS AGO
AND CLOSE OF 0 BARS AGO > OPEN OF 0 BARS AGO
AND HIGH OF 0 BARS AGO > CLOSE OF 0 BARS AGO
AND OPEN OF 1 BARS AGO > LOW OF 0 BARS AGO
AND LOW OF 0 BARS AGO > LOW OF 1 BARS AGO
AND HIGH OF 1 BARS AGO > HIGH OF 0 BARS AGO
It may be seen from the out of Price Action Lab that both of these patterns were profitable about 7 times out of every 10. The first pattern has 1% profit target and stop-loss and the second 6% profit target and stop-loss. Thus, the first is a short-term pattern and the second more of a medium term one.
Next, Price Action Lab generated code for Amibroker for the first pattern:
The code was used to backtest this pattern in Amibroker using historical data spanning the same period. These are the results for this first variation of the inside day pattern:
It may be seen that the win rate and number of trades agree with the results of Price Action Lab. In the next few days we will find out if the pattern will retain its high profitability by SPY moving higher or whether its profitability will decrease.
Disclosure: No relevant positions.
Chart Source: Amibroker
Disclaimer: The author is not a financial advisor and does not recommend the purchase of any security or advise on the suitability of any trade or investment in any timeframe. ETF, stock, futures, forex and options trading and investing involves substantial financial risks and can result in total loss of capital. If investment or other professional advice is required, a licensed professional should be consulted.
