In the 1990’s I used to spend a lot of time reading academic studies on the markets. If you’re patient and have the ability to spend some time digging, you can find some gems within the research journals that are out there.
The following study was recently forwarded to me and it may be of interest to you if you use Candlesticks to make your trading decisions. I’ve never been a big fan of candlesticks as I have never been able to find an edge using them versus traditional bar charts. In looking at this study, these professors seem to have come to the same conclusion-they’re unable to find any statistical significance when applying them to equities.
As they word it, “Using robust statistical techniques, we find that candlestick trading rules are not profitable when applied to DJIA component stocks over 1/1/1992 – 31/12/2002 period. Neither bullish or bearish candlestick single lines nor patterns provide market timing signals that are any better than what would be expected by chance. Basing ones trading decisions solely on these techniques does not seem sensible but we cannot rule out the possibility that they compliment some other market timing techniques”.
Here’s the link to the study: Market Timing with Candlestick Technical Analysis
Does this mean that candlesticks are useless? Probably not, as there are many successful traders that swear by them. But, at least for now, I have yet to see any studies that show their effectiveness. If you know of any, please feel free to post them here.
May 16, 2007 at 6:21 am
You may find Aronson’s book Evidence Based Technical Analysis of interest. He applies the same line of thought as this paper to traditional technical trading rules. Off the top of my head I think he tested something like 700 rules (350 rules and their inverses) and found 2 to be “potentially” statistically significant.
Combining indicators would take some time at the computer, but I think some simple TA/candlestick rules can provide a framework. I still wouldn’t rely on one as a strategy, though.