thanks to all the weekend threads for keeping plenty of the HC community involved. I found myself at the XJO thread during a quiet and drizzly Sunday . Was interested to read Redbacka talking about charting and candlesticks.
I hope he doesn't mind me posting a copy, i hadn't really heard much analysis on candlestick pattern reliabilty.
'Hi GJ,
Thanks for your thoughtful post. Worth reading.
According to Investopedia's analysis of Bulkowski, the five best candlestick patterns are the following:
1. Three line strike, 84% accuracy.
2. Two black gapping, 68% accuracy.
3. Three black crows, 78% accuracy.
4. Evening star, 72% accuracy.
5. Abandoned baby, 70% accuracy.
Note - none of these are single candle-stick patterns which generally have a low reliability.
With the increasing use of computers to analyse every possible "edge", sophisticated fund managers will front run any action by others and negate the "edge".
So - if you do have an "edge" expect over time for it to disappear.
This is probably what's happened, a much less sophisticated way, with the received wisdom about single candlesticks. (Legend has it that Japanese candlesticks have been around since the 1600's. More likely since the 1800's according to Nison's research.) Maybe, dragonfly dojis worked for many years in the way the received knowledge suggests - i.e., they are reversal patterns.
But their efficacy as a reversal signal, as Bulkowski suggests, is now non-existent as more and more knowledge about them was disseminated.
The following quote is from a paper "Market Timing with Candlestick Technical Analysis" by Marshall, Young and Rose, 2007 (Massey University, NZ.)
Using robust statistical techniques, we find that candlestick trading rules are not profitable when applied to DJIA component stocks over 1/1/1992 – 31/12/2002 period. Neither bullish or bearish candlestick single lines or patterns provide market timing signals that are any better than what would be expected by chance. Basing ones 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.
So - be careful of received knowledge about candlesticks. And use risk management in all trades.'
