On Candlestick-based Trading Rules Profitability Analysis via Parametric Bootstraps and Multivariate Pair-Copula based Models

Andreea Röthig, Andreas Röthig and Carl Chiarella

No 362, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: This study analyses the profitability of candlestick-based technical trading rules in currency futures markets. The main feature of this type of technical analysis is that it generates signals based on the relationships between several price series, i.e. open, high, low and close prices. Since the trading rules are not precise and mainly based on causal knowledge of traders, we use a fuzzy-system to mathematize and classify them. The profitability of the trading rules is then tested by means of a bootstrap technique using a multivariate parametric model, in order to cope with the multivariate premise of the candlesticks. The model employs different time series, a nonnegative valued return (the absolute daily return), two non-negative valued ranges, one strictly positive range (the daily range) and a binary time series (the sign of the daily return). The multivariate distribution of the full model is constructed by means of a (Pair-)Copula approach, and we use a two-stage estimation method to identify its coefficients. The analysis is applied to data on British Pound, Swiss Francs and Japanese Yen futures prices from 1978 to 2013. The results show, that not all candlestick-based trading rules are profitable and only very few have a statistically significant predictive value in the analysed currency futures markets.

Keywords: Candlesticks; Technical Trading; Fuzzy-Systems; Parametric Bootstrap; Multiplicative Error Models; Pair-Copula; Futures Markets (search for similar items in EconPapers)
JEL-codes: C10 C32 C51 F31 G1 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2015-08-01
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