The Forbidden Pattern Toolbox – Usingeasylanguage

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The Forbidden Pattern Toolbox

Now you can get a chance to get Murray’s Forbidden Pattern Toolbox early bird with free upgrades for only $249.00 for the next seven days after that it will be $299.00. This toolbox lets you research developing pattern-based systems and automate the process. Conduct months of research in a few hours.

Designed for TradeStation and MultiCharts

Take your research to a whole new level with this fully disclosed powerful tool. In a perfectly random or efficient market, every pattern has an equal opportunity to occur. Theoretically, there are patterns that should not occur due to the underlying deterministic structure. However, they do, and this provides insight into the chaotic or non-random nature of the market. This tool allows you to define a pattern and then analyze all its possible permutations. Is there an 8-bar pattern that reveals one of these forbidden patterns? Have you ever wondered what the market does after three down closes in a row? How about what happens after a pivot low is formed and the RSI is below 30? What happens after two inside bars and a breakout to the downside? All these ideas can be easily tested with this new tool. Can you uncover a technical edge and then put it to work for you? Let’s find out. This code is completely open-source! This package includes several trading systems. Plus you get fully disclosed code for this very clever EasyLanguage addon.

Introduction

The Forbidden Pattern toolbox is a very powerful tool that is only limited by your own creativity. All source code is provided to help understand the concepts and for customization. Several templates in the forms of indicators and strategies are included to get you started. Here is a quick snapshot of some of those templates.

ForPatt_NBar Indicator:A good introduction into the toolbox.This plotless (nothing appears on the chart) indicator creates the pattern analysis utilizing the simple formula (Close – Close[1]).The maximum pattern length in this example is set to eight.The search spaceornumber of permutations covered by this analysis includes 256 different patterns based off the last eight bars.The eight-bar length is used for illustration purposes and could be reduced.If you wanted to analyze what happens after three consecutive closes down then you would use a bar length of three.The search space would not only include this pattern, but all patterns that are produced by the combination of the three bars’ closing relationships (2 to the 3rd power or 8); no stone is left uncovered.

ForPatt_NBar_HLC_3Bars Indicator: Building upon the prior indicator, this program outputs statistics on the last three bars’ H, L, and C relationship to its respective prior bar. In this example, the following three formulas are used:

• High of Bar0 – High of Bar1
• Low of Bar0 – Low of Bar1
• Close of Bar0 – Close of Bar1

Want to see what the future holds when the last three bars have descending highs, lows and closes? This indicator can provide the results when this pattern hits up. You have probably noticed the outcome of the formulas thus used in the toolbox results in a binary value (negative or positive – zero is considered positive). All pattern formulas must result in either a positive or negative result. Instead of using RSI > 50, you would use RSI – 50.

ForPatt_NBar_WF_Cases Indicator

ForPatt_NBar_WF_Cases Indicator: Uses the ForPatt_NBar indicator and plots the statistics on the chart in the form of a histogram. Every pattern in the search space is represented in this indicator. After the completion of the day, the n-bar pattern is matched up and then the total number of occurrences is plotted. In addition, the number of “up” cases are plotted as well as the current market bias. The calculation of the number of “up” and “down” cases is where the “WF” (Walk Forward) aspect of this indicator comes into play. The indicator, historically, looks forward to see what happens and keeps track of this information. The two prior indicators do the same thing, and this is reported in the text files that are created upon application of the indicators to a chart. The supplementary indicator, ForPatt_NBar_WF_Avg change adds an oscillator-based indicator and reveals the percentage change in price or ticks for the current day’s pattern. If the pattern has a high frequency of occurrences and “up” cases and the percentage change over the next n-bars is sufficiently high, then it might be a good time to be a buyer. 

ForPatt_NBar_WF Strategy: This strategy puts the indicators to work and verifies the predictability of each bar’s pattern match. You can specify the lookback period, minimum number of matches, minimum percent of “up” or “down” cases, minimum percent change and the number of bars a position is held before a trade is signaled. Here is something you can actually test for yourself with this strategy:

Go Long –

• 20 or more occurrences of a pattern
• 70% of those patterns are “up”
• 4% or more market move over the next three days

ForPatt_NBar_WF with Intermarket Strategy: Includes the ability to look at data2 to help decide to buy or sell. In this example, a simple moving average of data2 is used and toggled to either convergence or divergence to help confirm a trading decision. 

Translating Bars into Formulas

So far we have used simple formulas to compare relationships of consecutive bars going back in time n-bars. The real power of this tool is its ability to substitute formulas for bars. Let’s say we want to test the efficacy of buying after a pivot low is formed and the market moves out from an oversold environment. Basically, the logic behind this implies that the market made a new low and puts the environment into an oversold condition and then demand overcomes supply and the market moves up. Is this a market turning point and if so how long does it last? Let’s test this exact scenario and see what happens one, two and three days out. Here is a picture of the pattern we want to investigate:

I pulled the information about this particular pattern from the output and pasted it on the chart. As you can see from the graphic, the market forms a pivot low and the right side of the pivot pulls the market out of the oversold territory (RSI 14 > 30). What happens next? Well on this day the market initially goes down 1.3% on day 1 and then moves up on day 2 and day 3. By the end of day three the market is up nearly two percent.

ForPatt_NBar_4Formula Indicator: Another plotless indicator that converts four formulas into a binary representation. Here are the formulas from the prior example:

• Formula1(low[2] – low[1]) … left side of pivot low
• Formula2(low[0] – low[1]) …right side of pivot low
• Formula3(rsi(c,14) – 30) … pivot low is below RSI 30
• Formula4(rsi(c[1],14)- 30) … right side of pivot low is above RSI 30

In this example, the Forbidden Pattern not only looks for the pattern we want, but it also looks at all combinations of the formulas. You might find that three descending lows while the last two bars are below RSI 30 shows a higher level of predictability than the pattern you were originally searching. 

This is just the tip of the iceberg for the toolbox. The complete toolbox contains the following indicators and strategies:

Indicators:

1. ForPatt_4Formula
2. ForPatt_4Formula_WF_AvgChange
3. ForPatt_4Formula_WF_Cases
4. ForPatt_NBar
5. ForPatt_NBar_WF_AvgChange
6. ForPatt_NBar_WF_Cases
7. ForPatt_NBar_HLC_3Bars
8. ForPatt_NBar_HLC_3Bars_WF_AvgChange
9. ForPatt_NBar_HLC_3Bars_WF_Cases

Strategies:

1. ForPatt_4Formula_WF
2. ForPatt_4Formula_Match
3. ForPatt_HLC_3Bar_WF
4. ForPatt_HLC_3Bar_Match
5. ForPatt_NBar_WF
6. ForPatt_NBar_Match
7. ForPatt_NBar_WF_With Intermarket