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Candlesticks - Do They Work?
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
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7 Comments:
BTW, I've found that when you strip out all those indicators that aren't good enough to stand on their own, you get a lot closer to what the essence of market behavior IS. Every trader I know does this. They'll look at 50 difft things, but then base their decision off the one or two indicators they consistently find to work.
The quant departments in most of the major brokerages DO have it down to a science, not an art-- they can tell you probabilities for everything and they take their risk accordingly. Shouldn't it tell us something that most of the institutional trading is now driven by programs?
But that's exactly what he's talking about here. Independent Traders frequently use phrases like "Tend to" and "seem to", but that's simply not enough to base a decision where you're risking several thousands or even several millions.
Concl...
The bottom line, and I'm sure I'm preaching to the choir here, is that there are no silver bullets that work all the time. Market conditions must be accounted for, volume must be considered, sentiment must be considered, various time frames must be analyzed, etc... in order to gain a competitive edge. And it takes a lot of experience and trial and error to gain even a small advantage.
These are my observations in any case.
Cont...
For example, a stand alone hammer signal is not very reliable. However, a hammer that occurs at important levels of support (e.g.) an upward sloping trend line, seems to have a higher level of success. Probabilities further improve if the hammer, which occurred at the trend line, also occurs when indicators, such as the MACD exhibit a bullish divergence.
Cont...
I've found that most candle signals are worthless though. Evening stars don't appear to offer any advantage as stocks are almost as likely to keep trending higher after their appearance than they are to trend lower. On the other hand, a series of topping tails (2-4), especially when they occur at resistance (e.g., the underside of the 50-day average) tend to offer a good warning that prices are ready to reverse.
I find candlesticks somewhat useful, but not enough to rely on for trading signals. Candle signals alone aren't enough to buy and sell. Using them with other indicators can and does seem to provide an edge.
Like all TA, using candlesticks is an art form and as such, their usefulness is difficult to quantify in a statistical study.
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