Trend Definition or Holding Strategy: What Determines the Profitability of Candlestick Charting?

Tsung Hsun Lu, Yi Chi Chen, Yu Chin Hsu

Research output: Contribution to journalArticlepeer-review

11 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)172-183
Number of pages12
JournalJournal of Banking and Finance
Volume61
DOIs
Publication statusPublished - 2015 Dec 1

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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