Profitable candlestick trading strategies—The evidence from a new perspective

Abstract

This paper aims to investigate the profitability of two‐day candlestick patterns by buying on bullish (bearish) patterns and holding until bearish (bullish) patterns occur. Our data set includes daily opening, high, low, and closing prices of component stocks in the Taiwan Top 50 Tracker Fund for the period from 29 October 2002 through 31 December 2008. We examine three bullish reversal patterns and three bearish reversal patterns. We find that three bullish reversal patterns are profitable in the Taiwan stock market. For robustness checks, we evaluate the applicability of our results to diverse market conditions, conduct an out‐of‐sample test and employ a bootstrap methodology.

Trend definition or holding strategy: What determines the profitability of candlestick charting?

“…For example, Caginalp and Laurent (1998) claim that applying candlestick trading strategies on daily stock returns in S&P 500 stocks can result in profits compounding at an annual rate as high as 200%. The profitability of candlestick trading strategies is further confirmed by Goo et al (2007), Lu et al (2012) and Lu (2014). On the other hand, Marshall et al (2006Marshall et al ( , 2008 and Horton (2009) find that candlestick trading strategies do not have any predictive value for major equity markets.…”

“…Candlestick patterns are divided into two types: reversal patterns for a shift in trend and continuation patterns for persistence in the prevailing trend. Technical analysts argue that participants are inclined to sell at the peak and to buy at the bottom, and hence reversal patterns are more notable and meaningful (Nison, 1991;Brock et al, 1992;Lu et al, 2012). In practice, candlestick analysts place much more emphasis on reversal patterns than continuation ones (Nison, 1994), so we consider eight three-day reversal patterns in this study.…”

Market Sentiments Distribution Law

“…The working hypothesis is: "The intensity of the sentiments is distributed according to an exponential decay law" where we do the following basic equivalences [4,26]:…”

Is candlestick continuation patterns applicable in Malaysian stock market?

“…As the effectiveness of candlestick charting has been proven empirically in the Taiwan stock market [12,13,14,15] while positive evidence is provided for the European stock market [16,17] and even in China [18], there is no known research in the past that has tested specifically on the predictability of continuation patterns. The significance of continuation patterns shall not be ignored even though it might not be as profitable as the reversal patterns.…”