Using Price Action Lab to Discover Profitable Patterns Across Multiple Instruments

Starting with version 3.0, PAL allows searching for patterns that are profitable across a number of instruments, also called "common patterns" in the software. This feature provides another method of cross-validation of results that is believed to be very powerful - even more powerful than out_of_sample/forward testing - in the sense that the significance of patterns that are profitable across several instruments is higher because of the fact that they perform well not only with one instrument - something that can be the result of pure selection bias - but with many instruments and as a result any selection bias is reduced as a function of the number of such instruments involved. This is especially true when the instruments involved are not correlated.

PAL makes it extremely easy to discover such patterns. Version 3.0 provides a check box on the search workspace and a field to specify the minimum profit factor that each pattern in the results must have when backtested across different instruments. Two examples are given below for illustration purposes only.

Example 1: Determine profitable patterns across two currency pairs, EURUSD and GBPUSD with 100 pips profit target and stop-loss. Daily data used.

The search workspace was setup as follows:

The first search run was for regular patterns, not common. The results are shown below. A total of 86 patterns were found.

Next, using the same workspace, we mark the "Find Common Patterns Only" box, as shown below:

The new search found 33 patterns that are common to both currency pairs.

Example 2:   Determine profitable patterns across 3 ETFs, DIA, QQQ and SPY. The search workspace setup is shown below:

The regular search (no common patterns) yielded 166 patterns in total.

Next, the "Find Common Patterns Only" option is checked:

The results of the new search for common patterns are shown below. In this case, 78 patterns were found:

For more information see the program manual.