Testing the efficacy of candlestick patterns

I'vereadthemall

Member
74 9
Hello,

I hope that someone might be able to give me some ideas regarding the following;

My brother has a dissertation to do and his idea is to test the efficacy of various candlestick patterns as a reversal signal. He is trying to figure out a way to statistically verify whether the candlestick patterns that he tests show greater short term strength than randomly buying the market.

I.e. Do candlestick reversal patterns produce better returns at the bottom of a trend than randomly buying at the bottom of a trend.

His current plan is to run a couple hundred tests where he randomly buys a 10 day low...he will then average out the 5 and 10 day % returns of the closed positions.

He will then run another couple hundred tests and randomly buy each of the candlestick patterns tested if they are also at a 10 day low. Again he will average out the 5 and 10 day % returns of the closed positions.

If the average 5 and 10 day returns of the patterns are better than the average 5 and 10 day returns of randomly buying...is that adequate to suggest that the patterns have a 'predictive' quality?

I am curious to know whether there would be a better way of doing things and I hoped that the fine folks on this forum might be able to give better ideas of how one might do such a test.

If it matters, the tests will be on 10 years of data that includes all stocks currently listed on the Nasdaq and NYSE.

Thanks in advance for your help.
 
 
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