The intra-day performance of market timing strategies and trading systems based on Japanese candlesticks
(2013) Quantitative Finance — Vol. 13, n° 7, p. 1059-1070 (2013)
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- Abstract
- We develop market timing strategies and trading systems to test the intra-day predictive power of Japanese candlesticks at the 5-minute interval on the 30 constituents of the DJIAindex. Around a third of the candlestick rules outperform the buy-and-hold strategy at the conservative Bonferroni level. After adjusting for trading costs, however, just a few rules remain profitable. When we 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 after transaction costs. We also design fully automated trading systems by combining the best-performing candlestick rules. No evidence of out-performance is found after transaction costs. Although Japanese candlesticks can somewhat predict intra-day returns on large US caps, we show that such predictive power is too limited for active portfolio management to outperform the buy-and-hold strategy when luck, risk, and trading costs are correctly measured.
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Citations
Duvinage, M., Mazza, P., & Petitjean, M. (2013). The intra-day performance of market timing strategies and trading systems based on Japanese candlesticks. Quantitative Finance, 13(7), 1059-1070. https://doi.org/10.1080/14697688.2013.768774 (Original work published 2013)