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Are candlestick technical trading strategies profitable in the Japanese equity market?

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Abstract

We show that candlestick charting, the oldest known form of technical analysis, is not profitable in the Japanese equity market over the 1975–2004 period. Candlestick technical analysis, which was developed in Japan in the 1600s, is deeply intertwined with Japanese culture and is very popular in Japan. However, there is no evidence candlestick technical trading strategies add value in either the entire 30 year period, in three 10 year sub-periods or in bull or bear markets.

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Notes

  1. Fock et al. (2005) find that candlestick technical analysis is not profitable on intraday German futures data; however, their study is less relevant to this paper for several reasons. Firstly, technical analysis books highlight that the significance of the close price to candlestick charting is due to it being the final price prior to the market being closed for a period. This suggests that candlestick technical analysis may not be as reliable on an intraday basis. Second, Fock et al. (2005) do not apply a bootstrapping methodology so their results are not directly comparable to ours.

  2. See Pring (2002).

  3. During the 1/1/1975–31/12/1989 period the Nikkei gained 930%, while it declined by 71% during the 1/1/1990–31/12/2004 period.

  4. We thank an anonymous reviewer for highlighting this.

  5. As far as we are aware, no one else has attempted to conduct this bootstrap procedure on more than 30 stocks.

  6. Results for the other null models are available on request.

  7. We initially intended to consider the profitability of candlestick technical analysis with varying levels of transaction costs but decided against this once it became evident that it is not profitable before transaction costs.

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Acknowledgments

We thank the editor, Cheng-few Lee, and two anonymous referees for comments that have improved the paper.

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Correspondence to Ben R. Marshall.

Appendix 1: Candlestick Single Lines and Reversal Patterns

Appendix 1: Candlestick Single Lines and Reversal Patterns

The description of each candlestick single line and reversal pattern is based around Morris (1995), Nison (1991, 2004), and Marshall et al. (2006).

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Marshall, B.R., Young, M.R. & Cahan, R. Are candlestick technical trading strategies profitable in the Japanese equity market?. Rev Quant Finan Acc 31, 191–207 (2008). https://doi.org/10.1007/s11156-007-0068-1

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