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The Predictive Power of Price Patterns

25 Pages Posted: 27 Sep 2006  

Gunduz Caginalp

University of Pittsburgh - Department of Mathematics

Henry Laurent

Mesirow Financial Investment Management

Abstract

Using two sets of data, including daily prices (open, close, high and low) of all S&P 500 stocks between 1992 and 1996, we perform a statistical test of predictive capability of candlestick patterns. Out-of-sample tests indicate statistical significance at the level of 36 standard deviations from the null hypothesis, and indicate a profit of almost 1% during a two-day holding period. An essentially non-parametric test utilizes standard definitions of three-day candlestick patterns and removes conditions on magnitudes. The results provide evidence that traders are influenced by price behavior. To the best of our knowledge, this is the first scientific test to provide strong evidence in favor of any trading rule or pattern on a large unrestricted scale.

Keywords: candlestick patterns, statistical price prediction, price pattern, technical analysis

JEL Classification: C12, G12

Suggested Citation

Caginalp, Gunduz and Laurent, Henry, The Predictive Power of Price Patterns. Applied Mathematical Finance, Vol. 5, pp. 181-206, 1998. Available at SSRN: https://ssrn.com/abstract=932984

Gunduz Caginalp (Contact Author)

University of Pittsburgh - Department of Mathematics ( email )

507 Thackeray Hall
Pittsburgh, PA 15260
United States
412-624-8339 (Phone)
412-624-8397 (Fax)

Henry Laurent

Mesirow Financial Investment Management ( email )

350 N. Clark
Chicago, IL 60610
United States
312 595 7802 (Phone)
312 595 6988 (Fax)

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