What You Can Do with Price Action Lab
by Michael Harris

The purpose of this white paper is to outline some of the capabilities of Price Action Lab (PAL) and provide links to information about its effective use. There are many ways of using PAL and this white paper provides only a partial list.

Price Action Lab offers three main functions: search for price patterns, scan for price patterns and P-Indicator calculations.

The Search Function

The search function of PAL can be used to discover price patterns in historical daily or intraday data 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 daily 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.

Here are some things that one can do with the search function:

1. Discover price patterns in historical daily or intraday data that fulfill user-defined performance statistics and risk/reward parameters. This is the primary use of the program. An example can be found in this URL: http://www.priceactionlab.com/Screen_Shots/example/example.html

2. Discover price patterns in historical daily or intraday data that fulfill user-defined performance statistics and risk/reward parameters and are in addition profitable across several other securities (v3.0 only). Examples can be found in this URL: http://www.priceactionlab.com/Literature/common/common.html

3. Identify in which markets there are short-term trading opportunities and in which there are not by the number of short-term patterns the program generates.

4. Determine best profit target and stop-loss levels for particular markets by running a search with multiple parameters.

5. Determine best timeframe to trade by running different searches for different timeframes.

1. Discover price patterns formed as of the close of a security that fulfill user-defined criteria and risk/reward parameters. An example can be found here: http://www.priceactionlab.com/Blog/2011/09/a-short-qqq-pattern-with-a-5-profit-target/

2. Get the number of long and number of short patterns to use as a sign of direction.

3. Identify clusters of patterns formed as an indication of a high probability setup.

4. Determine the 1-bar win rate of patterns. Details can be found in this URL: http://www.priceactionlab.com/Blog/2010/11/n-bar-win-rate-of-trading-systems/

5. Identify historical profitable pattern with next-close exit.

6. Scan multiple securities with multiple parameters.

1. Calculate the probability of the direction of daily short-term moves. Examples can be found at this URL: http://www.priceactionlab.com/Literature/spyresults/spyresults.html

2. Determine the significance of the directional probability. Details can be found in this white paper: http://www.priceactionlab.com/Literature/pIndicator.pdf

3. Use correlated symbols and check for agreement or disagreement in the results as an indication of higher/lower success rate.

4. Determine the p-indicator values for multiple securities and for multiple parameters.

http://www.priceactionlab.com/Support/support.html

Program manual:

http://www.priceactionlab.com/Manual/manual.html

How PAL Differs from Traditional Back testing Programs:

http://www.priceactionlab.com/synthesis.pdf

An Introduction to Price Patterns:

http://www.priceactionlab.com/Literature/article2/article2.html

Links to material about trading in general

Position sizing:

http://www.priceactionlab.com/Literature/PositionSizing.pdf

http://www.priceactionlab.com/Literature/Kelly.pdf

http://www.priceactionlab.com/Blog/2011/08/optimal-position-size-methods-and-other-misconceptions/

Introduction to back-testing:

http://www.priceactionlab.com/Literature/introbacktesting.pdf

http://www.priceactionlab.com/Blog/2011/09/curve-fitting-and-optimization/

Profitability and risk:

http://www.priceactionlab.com/Literature/profitability.pdf

http://www.priceactionlab.com/Blog/2011/04/what-every-trader-should-know-about-the-win-rate-profit-factor-and-payoff-ratio/

http://www.priceactionlab.com/Blog/2010/10/account-undercapitalization-is-the-primary-cause-for-trader-failures/

http://www.priceactionlab.com/Literature/LeverageMarginEquity.pdf

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.