Price Action Lab™ (PAL) is user-friendly software program that systematic and discretionary quant traders can use to discover trading strategies and identify high probability setups based on price patterns. Click here to download the free demo.
PAL was developed after applying Occam’s razor to strategy development process. The program analyzes price action in a way that is fundamentally different from programs based on genetic algorithms or neural networks. The PAL algorithm produces the same output each time it encounters the same conditions and this determinism is in compliance with the standards of scientific testing and analysis. In addition, the price pattern search engine of PAL was designed to minimize data-mining and selection bias.
Price Action Lab has three main functions: search for price patterns, scan for price patterns and P-indicator calculations. The search function may be used by system traders to develop strategies and the other two functions are used by discretionary traders for price action analysis and identification of high probability setups.
The Search Function (Click here for an example)
The search function can be used to discover price patterns in historical data of any timeframe that fulfill user-defined performance statistics and risk/reward parameters. The patterns can be grouped in any way the user desires and in the case of daily data they can be added to the system tracking module of the program for monitoring signal generation. Alternatively, the program can generate code for a variety of trading platforms so that the price patterns can be implemented as indicators or trading systems. When the search function is used, PAL serves as a system that discovers trading systems automatically. This is an example of a search workspace to find patterns in SPY:
Below is a partial list of what the search function can accomplish:
- Discover price patterns in historical data that fulfill user-defined performance statistics and risk/reward parameters. This is the primary use of the program by a system quant trader. Detailed examples with in-sample and out-of-sample tests can be found here.
- Discover price patterns in historical data that fulfill user-defined performance statistics and risk/reward parameters and are in addition profitable across several other securities. Examples can be found here.
- Identify in which markets there are short-term trading opportunities by looking at the number of short-term patterns the program generates.
- Determine best profit target and stop-loss levels for particular markets by running a search with multiple parameters. The Price Series Statistics tool can be used to confirm the findings.
- Determine best timeframe to trade by running different searches in different timeframes.
- Use code generation to implement systems in various platforms and the raw code generation option to generate a file to be used as input for neural network or genetic programming engines.
- Perform portfolio backtests and exit sensitivity analysis to identify robust patterns. Click here for details and examples.
- Identify mean-reverting strategies. Instead of finding robust patterns that maintain their profitability, one may identify high win rate patterns with a tendency for the win rate to revert to 50%. Click here for an example.
- Random System Simulation and Significance Test capability. Click here for details.
The Scan Function (Click here for an example)
The scan function can be used to determine whether there are any patterns formed as of the close of the most recent bar in daily data that fulfill the user-defined criteria set on the scan workspace. Below is an example of a scan workspace to find high probability setups in a group of popular ETFs for 2% profit target and stop-loss and also for next close exit:
Below is a partial list of what the scan function can accomplish:
- Discover price patterns formed as of the close of a security that fulfill user-defined criteria and risk/reward parameters. Click here for an example.
- Get the number of long and number of short patterns to use as a sign of direction.
- Study the sensitivity of pattern formations to changes in exit values.
- Identify clusters of patterns to serve as an indication of a high probability setup.
- Determine the 1-bar win rate of patterns.
- Identify historical profitable pattern with next-close exit. Click here for an example.
- Scan multiple securities with multiple parameters. Click here for details.
- Use the scan output for managing risk of open positions. This is an example.
- Perform a portfolio backtest of the scan results to identify robust patterns. Click here for more details and examples.
The p-indicator Function (Click here for an example)
The p-indicator is one of the most advanced technical analysis indicators ever developed. Its values indicate the probability of the direction of short-term moves in daily data. Below is an example of a p-indicator workspace applied to selected ETFs with an ensemble of profit target and stop/loss pairs:
Below is a partial list of what the p-indicator function can accomplish:
- Calculate the probability of the direction of daily short-term moves. An example can be found here. A daily trading strategy can be found here.
- Determine the significance of the directional probability. Details can be found in this white paper.
- Use correlated symbols and check for confirmation of bias direction.
- Determine the p-indicator values for multiple securities and for multiple parameters. Click here for an example. Click here for backtesting examples of p-indicator signals.
Click here for an example of using the p-indicator.
The functions of Price Action Lab software are summarized in graphical form below:
There are several validation options included with the program. Note that the main advantage of Price Action Lab is that it is not based on genetic algorithms or neural networks. Click here for more details.
Links to useful information about PAL:
- Program FAQ
- Program manual
- How PAL Differs from Traditional Back testing Programs
- An Introduction to Price Patterns
Finally, the best way to become familiar with a program is by actually working with it. There are many ways to use a trading program depending on user’s experience and objectives and this also applies in the case of Price Action Lab.