Trend Definition or Holding Strategy: What Determines the Profitability of Candlestick Technical Trading Strategies?

Tsung-Hsun Lu (), Yi-Chi Chen () and Yu-Chin Hsu
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Tsung-Hsun Lu: Department of International Business Management, Shih Chien University, Kaohsiung, Taiwan
Yi-Chi Chen: Department of Economics, National Cheng Kung University, Tainan, Taiwan, http://economics.ncku.edu.tw/en/

No 14-A010, IEAS Working Paper : academic research from Institute of Economics, Academia Sinica, Taipei, Taiwan

Abstract: We ask what determines the profitability of candlestick trading strategies. Is it the definition of trend and/or the holding strategy that one uses in candlestick charting analysis? To answer this, we systematically consider three definitions of trend and four holding strategies. Applying candlestick trading strategies to the DJIA component data, we find that regardless of which definition of trend is used, eight three-day reversal patterns with a Caginalp-Laurent holding strategy are profitable when we set the transaction cost at 0.5% and after we account for data-snooping bias, while the patterns with a Marshall-Young-Rose holding strategy are not profitable. For sensitivity analysis, we also find that our results are not qualitatively changed on a lower transaction cost of 0.1%, or when we conduct the subsample analyses based on three equal periods and three distinct market conditions. When considering a more volatile market, evidence in favor of candlestick trading strategies is strengthened. JEL Classification-JEL: C12, G10, G11

Keywords: Candlestick charting; Technical analysis; Trading rules; Behavioral finance; Step-SPA test (search for similar items in EconPapers)
Pages: 35 pages
Date: 2014-09, Revised 2015-07
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Citations: View citations in EconPapers (2)

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