Trend Definition or Holding Strategy: What Determines the Profitability of Candlestick Technical Trading Strategies?

Preprint OPEN
Tsung-Hsun Lu ; Yi-Chi Chen ; Yu-Chin Hsu (2014)
  • Subject: Candlestick charting, Technical analysis, Trading rules, Behavioral finance, Step-SPA test

We ask what determines the profitability of candlestick patterns. Is it the definition of trend and/or the holding strategy that one uses in candlestick charting analysis? To answer this, we conduct a systematic investigation by considering three definitions of trend and four holding strategies. Based on the DJIA components data, we find that eight three-day reversal patterns with a Caginalp-Laurent holding strategy are profitable after we account for data-snooping bias. We also find that our results are not qualitatively changed when we conduct the subsample analyses based on three equal periods, and three distinct market conditions. JEL Classification-JEL: C12, G10, G11
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