The predictive power of Japanese candlestick charting in Chinese stock market
Si Bao and
Physica A: Statistical Mechanics and its Applications, 2016, vol. 457, issue C, 148-165
This paper studies the predictive power of 4 popular pairs of two-day bullish and bearish Japanese candlestick patterns in Chinese stock market. Based on Morris’ study, we give the quantitative details of definition of long candlestick, which is important in two-day candlestick pattern recognition but ignored by several previous researches, and we further give the quantitative definitions of these four pairs of two-day candlestick patterns. To test the predictive power of candlestick patterns on short-term price movement, we propose the definition of daily average return to alleviate the impact of correlation among stocks’ overlap-time returns in statistical tests. To show the robustness of our result, two methods of trend definition are used for both the medium-market-value and large-market-value sample sets. We use Step-SPA test to correct for data snooping bias. Statistical results show that the predictive power differs from pattern to pattern, three of the eight patterns provide both short-term and relatively long-term prediction, another one pair only provide significant forecasting power within very short-term period, while the rest three patterns present contradictory results for different market value groups. For all the four pairs, the predictive power drops as predicting time increases, and forecasting power is stronger for stocks with medium market value than those with large market value.
Keywords: Candlestick patterns; Technical analysis; Daily average return; Step-SPA test (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:457:y:2016:i:c:p:148-165
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