SKEPTICISM TOWARD STOCK CANDLE STICKS

I attempted to objectively research the subject.

Article selection criteria:
 Article was published later than 1995.
 Article commented on the profitability of candlestick patterns, not just whether or not
they could be found.
 Article did not study theoretical candlestick patterns. It researched patterns that
traders use in practice.
Articles
Roy, Partha. (2012). Fuzzy candlestick approach to trade S&P CNX NIFTY 50 index using
engulfing patterns. International Journal of Hybrid Information Technology. 5. 57–66.
 Tested S&P CNX Nifty 50 Index of India with real-time 2012 data.
 Achieved “good returns” with 2-day engulfing pattern and a modified version of the
pattern they call the “U-Turn.”

“U-Turn” candlestick pattern

 Not sure how to interpret “good returns,” so scoring this as a “weak win for a few
specific patterns and loss for other one day patterns”
G. Caginalp & H. Laurent (1998) The predictive power of price patterns, Applied
Mathematical Finance, 5:3–4, 181–205, DOI: 10.1080/135048698334637
 Tested S&P 500 with data from 1992–1996.
 Found a profit of 1% possible over a two-day holding period (think about that
annually).
 Found Three Inside Up, Three Outside Down, and Evening Star patterns most
profitable. Three-day patterns were more profitable in general.
 Strong win for specific three-day patterns but loss for others.
Lu, Tsung-Hsun, Yung-Ming Shiu and Tsung-Chi Liu. “Profitable candlestick trading
strategies — The evidence from a new perspective.” (2012).
 Tested Taiwan Top 50 Tracker Fund with data from 2002–2008.
 Reviewed two-day patterns:
From Lu, Shiu, and Liu (2012)
 Found 9% returns with piercing pattern.
 Found support for bull engulfing pattern during a bull market, and support for the bear
engulfing patter during a bear market, but this was largely eliminated when put
through a more rigorous mathematical process called “bootstrapping.”
 Scoring this a win for specific patterns but a loss for others.
Marshall, B.R., Young, M.R. & Cahan, R. Rev Quant Finan Acc (2008) 31:
191. https://doi.org/10.1007/s11156-007-0068-1
 Tested Japanese equity market data from 1975 to 2004.
 Covered most patterns used by traders and found them not to be profitable.
 Loss for candlesticks.
Wu, Y., Lu, J., & Qi, A. (2017). Profitability of Candlestick Charting Patterns in the Stock
Exchange of Thailand. Advances in Mechanical
Engineering. https://doi.org/10.1177/1687814018819562
 Tested Thai Set 50 Index with data from 2006–2016.
 Tested most patterns traders use and found them not to be profitable.
 Loss for candlesticks.
Prado, Hércules & Ferneda, Edilson & Morais, Luis & Luiz, Alfredo & Matsura, Eduardo.
(2013). On the Effectiveness of Candlestick Chart Analysis for the Brazilian Stock Market.
Procedia Computer Science. 22. 10.1016/j.procs.2013.09.200.
 Tested Ibovespa, a Sao Paulo Stock Exchange Index, with data from 2005–2009.
 Covered most patterns used by traders and found them not to be profitable.
 Loss for candlesticks.
Zhu, Min & Atri, Said & Yegen, Eyub. (2015). Are candlestick trading strategies effective in
certain stocks with distinct features?. Pacific-Basin Finance Journal. 37.
10.1016/j.pacfin.2015.10.007.
 Tested all stocks traded on the Shanghai and Shenzhen exchanges with data from
1999–2008.
 Examined two-day candlestick patterns.
 Found that, “Bearish harami and cross patterns do well in predicting the turning
points of upward trends while bullish piercing, engulfing, and harami profitably predict
the turning points of downward swings” (Zhu, Atri, and Yegen).
 Best results from holding one day for bullish patterns and five days for bearish
patterns.
 Suggest candlestick patterns may be more profitable in exchanges with more
individual investors, such as the young Chinese exchanges, rather than ones with
strong institutional investors, such as US markets.
 Win for two-day candlestick patterns in non-institution dominated exchanges.
Tsung-Hsun Lu & Yung-Ming Shiu (2016) Can 1-day candlestick patterns be profitable on
the 30 component stocks of the DJIA?, Applied Economics, 48:35, 3345–3354,
DOI: 10.1080/00036846.2015.1137553
 Tested 30 stocks from the Dow Jones Industrial Average over data from 1974 to
2009.
 Best results from Gravestone Doji, which had 1.17% returns over a one-day period
and 1.71% returns over a five-day holding period.
 Win for specific candlestick pattern. Loss for others.
One day candlestick patterns from Lu & Shiu
Horton, Marshall. (2009). Stars, crows, and doji: The use of candlesticks in stock selection.
The Quarterly Review of Economics and Finance. 49. 283–294. 10.1016/j.qref.2007.10.005.
 Tested 349 randomly selected stocks with representation of all major industries from
the Value Line database with data from 1992–1996.
 Also tested the S&P 500 with data from 1992–1996.
 Covers most patterns traders use.
 Found no impact — loss for all candlestick patterns.
Tharavanij, P., Siraprapasiri, V., & Rajchamaha, K. (2017). Profitability of Candlestick
Charting Patterns in the Stock Exchange of Thailand. SAGE
Open. https://doi.org/10.1177/2158244017736799
 Tested Dow Jones Industrial Average over data from 1992 to 2002.
 Covered most known patterns (actually went through authoritative Japanese
literature on the subject).
 Found no impact — loss for all candlestick patterns.
Overall, the findings are mostly negative for candlestick patterns. However, there may be
enough pattern-specific evidence to validate a trader’s individual experience.
I personally find fascinating Zhu, Atri, and Yegen’s suggestion that candlestick patterns may
be more effective in environments with fewer institutions.