In this article we outline a procedure for generating trading signals from strategies developed with Price Action Lab. This is a basic methodology for strategies in the daily timeframe and it makes use of the system tracking capability of the software.
This example of trading strategy signal generation assumes the following:
- Strategies are based on end-of-day data
- The next open is used to open a new trade
- Trades are entered manually
Note that this is not an example of an auto-trading system. Auto-trading requires extensive code development that depends on the platform used to transmit the orders to the exchanges. In addition, the code must include safeguards against failure, proper calculation of position size based on risk and available equity and all other conditions that are necessary for successful auto-trading. In the case of manual trading most of these requirements and conditions are handled by the trader.
The following two steps are involved in generating signals for a strategy developed using Price Action Lab that is already saved in system tracking:
- Update data after the close
- Run system tracking
Step 1: Update data
This step is absolutely necessary for a successful operation of system tracking. The data files required by the system must be updated in the directory specified in system tracking. Below is an example strategy for SPY that comes with the demo version for informational purposes only. The strategy is already saved in system tracking:
It may be seen that the data location is C:\System Data. This means that the data must be updated in that directory.
Methods for updating data:
- Data vendor software
- Command lines and scripts
When trading only one or two securities, data can be updated even manually by editing the files. Data vendor software often has capability of automatically updating data files. This can also be done using scripts and update data from various data sources.
In this example, the updated file includes data only for 2016. Normally, one would need more than 20 bars in the file to generate all signals.
Step 2: Run System Tracking
This is as simple as clicking Run in system tracking mode:
It may be seen that as of the close of 05/17/2016 (LAST DATE in data) two new long signals were generated for NEXT OPEN by two different patterns in the strategy. The profit target and stop loss of 2.5% are also shown along with the system name.
Position size depends on risk objectives. Usually only one signal is taken and if there is an open short it is closed before the new long is opened. However, the details depend on trader’s objectives. This is a description of how to generate signals, not how to actually trade them.
A list of the patterns in the strategy is obtained by highlighting the trading system and then clicking View. For the above example, this is the result:
The results show which patterns have generated signals this year since the data file includes data only for 2016. The Test Patterns function may be used to get the list of signals for the year and an equity curve:
It may be seen that there is already an open long position from 04/29/2016. A trader may want to ignore the new long signals or increase risk. The details depend on risk profile and objectives of each trader.
Finally, if a system trades at the close, the candidate patterns along with the conditions that price must meet on the last date to trigger signals are also list in system tracking. In that case, there is some monitoring work to be done by the trader to determine which signals will be triggered by the close.
This is how signals are generated by Price Action Lab for strategies that meet the requirements listed in the beginning of the article.
More details can be found in the program manual.