TY - JOUR
T1 - Trend Definition or Holding Strategy:
T2 - What Determines the Profitability of Candlestick Charting?
AU - Lu, Tsung Hsun
AU - Chen, Yi Chi
AU - Hsu, Yu Chin
N1 - Funding Information:
We thank the Editor, Carol Alexander, an associate editor, two anonymous referees, and Po-Hsuan Hsu for helpful comments. Yi-Chi Chen thanks Chang-Ching Lin for computing assistance. All errors and omissions are our own responsibility. This research is partially supported by Ministry of Science and Technology of Taiwan under Grant No. MOST103-2410-H-006-005 . Yu-Chin Hsu gratefully acknowledges the research support from Ministry of Science and Technology of Taiwan (MOST103-2628-H-001-001-MY4) and Career Development Award of Academia Sinica , Taiwan.
Publisher Copyright:
© 2015 Elsevier B.V.
PY - 2015/12/1
Y1 - 2015/12/1
N2 - 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.
AB - 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.
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U2 - 10.1016/j.jbankfin.2015.09.009
DO - 10.1016/j.jbankfin.2015.09.009
M3 - Article
AN - SCOPUS:84943268590
SN - 0378-4266
VL - 61
SP - 172
EP - 183
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
ER -