Candlesticks not profitable Massey University Research

[laptop1]

Everyone talks a good game.

 

[firewalker99]

In fact, in my experience of using Candlestick charts for the past 5 years, the accuracy rate has been 100%. The few mistakes I have made using these charts were due to my erroneous interpretation of the signals. Most Traders do not know how to interpret Candlestick signals and hence, when they screw up, they blame the Charts instead of themselves.

I think this can be said about almost everything. It's always the trader's interpretation, it's never the chart that's wrong...

 

[The Baptist]

Hi Socrates, glad you contributed to this. I have no problems with the research methodology, or indeed its findings. They formed a hypothesis, and tested it. Obviously they could have saved themselves a lot of time trouble and expense, as the outcome was obvious !

However, If I remember correctly, the study didnt include the use of volume, Id be genuinely interested to hear your thoughts on that, for example do you feel that certain patterns may have proved to be statistically significant if perhaps volume had been included in the analysis ?

If I where a vendor, peddling a product that was candlestick based, I think Id try to defend my product, by pulling the "lack of volume" argument, and Im genuinely surprised that to date no one has. I'd be interested to hear your take on this.

regards
zu

Hi Zu, others

I have previously discussed volume at some length in this post.
http://www.trade2win.com/boards/showthread.php?p=288638#post288638

The just of it being, it is less functionally indictive of direction and more of an amplfier of the action/direction the pricing denotes of itself.

Simply stated the greater volume on a strong down move, the more significant/broad the market opinion is of the rerating.

I do not feel the revelance of Volume in a candles context is any more relevant than in any other charting format hence the post linked in is not candles specific.

Best Wishes

 

[zupcon]

Hi Zu, others

I have previously discussed volume at some length in this post.
http://www.trade2win.com/boards/showthread.php?p=288638#post288638

The just of it being, it is less functionally indictive of direction and more of an amplfier of the action/direction the pricing denotes of itself.

Simply stated the greater volume on a strong down move, the more significant/broad the market opinion is of the rerating.

I do not feel the revelance of Volume in a candles context is any more relevant than in any other charting format hence the post linked in is not candles specific.

Best Wishes

Hi thanks for the link, I'll definately check out the thread.

kind regards
zu

 

[Youp]

Question

Has anyone a clue why untill now, almost no serious academic research about the profitability of Japanese candlesticks has been done?

The reason why I ask this, is because I use this paper from Marshall for my master thesis. And, although it is about 16 years ago Nison has published his book, charting programs offer candlestick charts etc. I can't find an answer on this question. So I hope one of you has a clue!

 

[trader_dante]

Jack Schwager did a similar test and concluded that candlesticks taken on their own are not profitable.

The point that seems to be missed is that candlesticks become profitable when combined with other supporting factors.

E.g A hammer at a swing low INDICATES a possible reversal. Rather than blindly take it long we would look for confluence.

Does the nose of the hammer hit any key fib levels? Does it hit any support levels? Does it hit a calculated pivot point?

This is how your probability of success when trading them rises.

If tests were done with this in mind (virtually impossible however since TA is largely subjective) then the results would be vastly different and would show profitability.

 

[firewalker99]

Has anyone a clue why untill now, almost no serious academic research about the profitability of Japanese candlesticks has been done?

The reason why I ask this, is because I use this paper from Marshall for my master thesis. And, although it is about 16 years ago Nison has published his book, charting programs offer candlestick charts etc. I can't find an answer on this question. So I hope one of you has a clue!

It would be interesting to hear your conclusions after finishing the master's degree

 

[barjon]

Has anyone a clue why untill now, almost no serious academic research about the profitability of Japanese candlesticks has been done?

The reason why I ask this, is because I use this paper from Marshall for my master thesis. And, although it is about 16 years ago Nison has published his book, charting programs offer candlestick charts etc. I can't find an answer on this question. So I hope one of you has a clue!

youp

Research about "the profitability of candlesticks" is rather like researching the artistic merit of a paint palette. It's the craftsman who delivers the goods, not his tools and that's what most academic research into trading fails to recognise.

good trading

jon

 

[kenobi]

Has anyone a clue why untill now, almost no serious academic research about the profitability of Japanese candlesticks has been done?

The reason why I ask this, is because I use this paper from Marshall for my master thesis. And, although it is about 16 years ago Nison has published his book, charting programs offer candlestick charts etc. I can't find an answer on this question. So I hope one of you has a clue!

For a simple reason .......in order to statistically conclude if candlestick patterns (not candlesticks on their own) are profitable, one needs to build a model.

As you know, a model is an "abstraction and simplification of reality". So, it is very easy to build a model in which one can conclude that they are profitable, or another in which one bashes them

The point is that, until a model is built such that it incorporates a concept such as "THE CONTEXT" (and by context you need to understand "where, how, and when" candlestick patterns appear, when they have a high probability and when a low probability).


So, first understand and incorporate "context" and then you can build a model that filters the noise, and you will be able to produce statistical research that can yield conclusions......

Hope it helps and it keeps you away from "textbook" answers

 

[trader_dante]

youp

Research about "the profitability of candlesticks" is rather like researching the artistic merit of a paint palette. It's the craftsman who delivers the goods, not his tools and that's what most academic research into trading fails to recognise.

good trading

jon

Excellent post. That is exactly what this academic research tries to do.

That is why it is pretty much useless.

 

[dbphoenix]

Jack Schwager did a similar test and concluded that candlesticks taken on their own are not profitable.

The point that seems to be missed is that candlesticks become profitable when combined with other supporting factors.

E.g A hammer at a swing low INDICATES a possible reversal. Rather than blindly take it long we would look for confluence.

Does the nose of the hammer hit any key fib levels? Does it hit any support levels? Does it hit a calculated pivot point?

This is how your probability of success when trading them rises.

If tests were done with this in mind (virtually impossible however since TA is largely subjective) then the results would be vastly different and would show profitability.

Candlesticks aren't any more profitable than any other means of displaying price points, regardless of what other "supporting factors" are considered.

What is at the root of profitability is an understanding of price action. Whether one uses candlesticks, bars, histograms, lines, or dots is immaterial. One can also lay on pivot points, Fib levels, innumerable indicators (including trendlines and MAs), but none of it is particularly germane and will most likely lead, eventually, to failure unless one understands the underlying price action.

Those who do succeed over time (i.e., more than a few weeks or months or even years) very likely develop an understanding of price action which on the surface they do not realize they possess. It is likely this that acts as the "intuition" they employ when trading against whatever their indicators/levels/lines are telling them to do. How much more secure might they be if they were to pursue this study of price action rather than remain in conflict -- sporadic though the conflict may be -- with whatever indicator systems/strategies/methods they have developed?

Db

 

[Youp]

Everbody thanks for your input.
Almost everyone says the same but with different words.

It is the context which is important to include in the research. This is of course very true, but also very difficult. By putting the candlesticks to test you must make the context objective and when you see the chart in reality some objective points combined with subjectivity decides if one places a trade or not.

But for my research its more obvious . Under the circumstances included in the research are the candlesticks profitable or not:!: This is very important, when you include different circumstances, a different outcome is possible. And then is the question: What's more important, the candlesticks of the circumstances?

When finished I will post the context of the research and the conclusions in this thread.

 

[kenobi]

Everbody thanks for your input.
Almost everyone says the same but with different words.

It is the context which is important to include in the research. This is of course very true, but also very difficult. By putting the candlesticks to test you must make the context objective and when you see the chart in reality some objective points combined with subjectivity decides if one places a trade or not.

But for my research its more obvious . Under the circumstances included in the research are the candlesticks profitable or not:!: This is very important, when you include different circumstances, a different outcome is possible. And then is the question: What's more important, the candlesticks of the circumstances?

When finished I will post the context of the research and the conclusions in this thread.

dont bother mate.......you already answered ....it is the circumstances

i assume you are doing either a maths course or a finance course......if its a finance course, then you will know that if you are a 1,000,0000 revenue a year business it is not the same to owe 100 quid to the bank than to owe 100 million

 

[StupendousTrader]

Everbody thanks for your input.
Almost everyone says the same but with different words.

It is the context which is important to include in the research. This is of course very true, but also very difficult. By putting the candlesticks to test you must make the context objective and when you see the chart in reality some objective points combined with subjectivity decides if one places a trade or not.

But for my research its more obvious . Under the circumstances included in the research are the candlesticks profitable or not:!: This is very important, when you include different circumstances, a different outcome is possible. And then is the question: What's more important, the candlesticks of the circumstances?

When finished I will post the context of the research and the conclusions in this thread.

Hi Youp:

The following is what started this thread:

" Candlesticks not profitable Massey University Research
The Massey University Finance Dept. carried out research by Ben R. Marshall, Martin R. Young and Lawrence C. Rose, Dept. of Finance established from their research that candlesticks do not work and are not profitable, this research was released 16 April 2007.

We investigate the profitability of the quantitative market timing technique of candlestick technical analysis in the U.S. equity market. Despite being used for centuries in Japan and now having a wide following amongst market practitioners globally, there is little research documenting its profitability or otherwise. We find that these strategies are not generally profitable when applied to large U.S. stocks. Basing trading decisions solely on these techniques does not seem sensible but we cannot rule out the possibility that they compliment some other market timing techniques.

Download research link http://ssrn.com/abstract=980583"

The premise of the topic itself "Candlesticks not profitable" is plainly stupid. If you need to do research on the profitability of a "particular market", you should do you your research on successful and unsuccessful TRADERS in that market. Do your research on their personal psychology or self management skills, trading methodologies, money management skills and systems, risk management skills and systems, portfolio/trade management skills and systems and most important of all, their exact thoughts at the moments of entering a trade or getting out. As a bonus, you can then investigate how many of these successful and unsuccessful TRADERS use candlestick signals as part of their trading methodology. If you can actually do a research of the above on a significant number of successful and unsuccessful TRADERS in a particular market, your research will not only make a lot of sense but will also make you a lot of money if complied into a book. I am ready to buy such a book from you.

I hope you will all stop blowing hot air with this nonsense about the profitability or unprofitability of candlestick signals. A Candlestick signal is just one of numerous tools a Trader uses to make a decision on what to do in the market. Circumstances or trading situations are controlled by the Trader. He does not have to trade if he is uncomfortable or conditions are not favorable. No one is putting a gun to his head.

Finally, I boldly make the following statement. A Trader's level of consciousness to take the right actions at the very moment of trading dictates his success or failure. This should be your best research topic.

 

[yacarob1]

Saying that Candlesticks do not work is like saying charting and fundamental analysis do not work.

They are simply a method of chart presentation and I use them in favour of bar charts because I find them easier on the eye and they throw out the required information more easily than bar charts do. That's for me anyway...some people prefer bar charts or line charts for whatever reason.

I use them with various indicators ( EMA, VWAP etc. etc. ) and the combination of the various tools that I use, which include candlesticks, does work quite nicely.

For those out there having trouble with making candlesticks work, I would suggest that you keep them in a dry place and out of the wind. Then they should work quite nicely. That piece of advice has just come from my wife, a committed Catholic who is really into these things.

 

[Youp]

If you can actually do a research of the above on a significant number of successful and unsuccessful TRADERS in a particular market, your research will not only make a lot of sense but will also make you a lot of money if complied into a book. I am ready to buy such a book from you.


Sorry, I just like to graduate .
I have chosen a topic that I like...do some research and get my degree.
I will also incorporate a research upon the importance of the open and close prices as the literature says this are extremely important moments. Just see if this is true under the tested circumstances.

@ Kenobi: Yes you're right. A finance course...wasn't hard to guess

 

[dbphoenix]

Sorry, I just like to graduate .
I have chosen a topic that I like...do some research and get my degree.
I will also incorporate a research upon the importance of the open and close prices as the literature says this are extremely important moments. Just see if this is true under the tested circumstances.

I felt the same way when I was working on my dissertation: get it done and get out. However, doing something that interests you will make all of it easier to do and to complete.

You probably know by now that theses and dissertations do not generally address global issues. If they are in any way experimental, they must be highly specific. Otherwise, the uncontrolled variables make whatever conclusions you might reach questionable (which is the result for most research I see, even when done by people who ought to know better).

Therefore, answering the question "are candlesticks profitable" will be impossible. You'll have to be very specific about the patterns you're testing, the interval you're using, and the context in which you're placing them. You said earlier that "it is the context which is important to include in the research", which is true. You also said, however, that this is "also very difficult", which is not necessarily true. You just have to control your variables. If, for example, you want to use the open and close, all you have to do is define "open" and "close" (not quite the simple-minded task it seems to be). And so on.

Of course, whatever you find will apply only to the patterns, interval, and context you're testing, but this is the nature of research, building evidence over time until one can begin to reach some more general conclusions.

Db

 

[jwhtrades]

Does anyone have any experience using the Nison Candle Scanner for Trade Navigator or Ninja Trader?

 

[prst]

nice debate about the candlesticks.

just wanted to put my cents.

I feel candlesticks cant be used on their own, as a system.
however, they compliment nicely when used with price action.
I find them giving a better exit, when compared to other charts. ( a doji, hammer or a spinning top should always alert u ).