The Intraday Performance of Market Timing Strategies and Trading Systems Based on Japanese Candlesticks

Quantitative Finance, vol. 13 (7), 2013

27 Pages Posted: 8 Aug 2012 Last revised: 23 Jan 2016

See all articles by Matthieu Du Duvinage

Matthieu Du Duvinage

National Bank of Belgium

Paolo Mazza

IESEG School of Management

Mikael Petitjean

Catholic University of Lille - IÉSEG School of Management, Lille Campus; Lille Economie & Management (LEM) UMR 9221; Louvain School of Management (UCL); Catholic University of Louvain (UCL) - Louvain Finance (LFIN)

Date Written: August 7, 2012

Abstract

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.

Keywords: Technical analysis, trading systems, market timing, bootstrap, SSPA, Japanese candlesticks

JEL Classification: G14, G17, C58

Suggested Citation

Duvinage, Matthieu Du and Mazza, Paolo and Petitjean, Mikael, The Intraday Performance of Market Timing Strategies and Trading Systems Based on Japanese Candlesticks (August 7, 2012). Quantitative Finance, vol. 13 (7), 2013. Available at SSRN: https://ssrn.com/abstract=2125889 or http://dx.doi.org/10.2139/ssrn.2125889

Matthieu Du Duvinage (Contact Author)

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Paolo Mazza

IESEG School of Management ( email )

3 Rue de la Digue
Office: A321
Lille, 59 59000
France

HOME PAGE: http://https://sites.google.com/site/paolomazzaphd/

Mikael Petitjean

Catholic University of Lille - IÉSEG School of Management, Lille Campus ( email )

3 rue de la Digue
Lille, 59000
France
0032497301266 (Phone)
59000 (Fax)

Lille Economie & Management (LEM) UMR 9221 ( email )

Lille
France

Louvain School of Management (UCL) ( email )

Belgium

Catholic University of Louvain (UCL) - Louvain Finance (LFIN) ( email )

34 Voie du Roman Pays - L1.03.01
Louvain-la-Neuve, 1348
Belgium

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