The Intraday Performance of Market Timing Strategies and Trading Systems Based on Japanese Candlesticks
affiliation not provided to SSRN
Louvain School of Management (UCL); Université Catholique de Louvain
Louvain School of Management (UCL)
August 7, 2012
We develop market timing strategies and trading systems to test the intraday predictive power of Japanese candlesticks at the 5-minute interval on the 30 constituents of the DJIA index. Out of 83 Japanese candlestick rules, around a third outperforms the buy-and-hold strategy at the conservative Bonferroni level. After trading costs, just a few rules remain significant however. We also correct for data snooping by applying the SSPA test on double-or-out market timing strategies. No single candlestick rule beats the buy-and-hold strategy when trading costs are taken into account. Finally, we design fully automated trading systems by combining the best performing market timing rules. Out of the 24,232 rules and systems tested on average per stock, no evidence of outperformance is found after transaction costs. Although Japanese candlesticks can somewhat predict intraday returns, we show that such predictive power is not useful for active portfolio management. When luck, risk, and trading costs are correctly measured, we find that intraday trading activity on large US caps is not sufficiently inefficient for the buy-and-hold strategy to be beaten by Japanese candlestick trading rules.
Number of Pages in PDF File: 27
Keywords: Technical analysis, trading systems, market timing, bootstrap, SSPA, Japanese candlesticks
JEL Classification: G14, G17, C58working papers series
Date posted: August 8, 2012
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