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The predictive power of price patterns


  • G. Caginalp
  • H. Laurent


Using two sets of data, including daily prices (open, close, high and low) of all S&P 500 stocks between 1992 and 1996, we perform a satistical test of the predictive capability of candlestick patterns. Out-of-sample tests indicate statistical significance at the level of 36 standard deviations from the null hypothesis, and indicate a profit of almost 1% during a two-day holding period. An essentially non-parametric test utilizes standard definitions of three-day candlestick patterns and removes conditions on magnitudes. The results provide evidence that traders are influenced by price behaviour. To the best of our knowledge, this is the first scientific test to provide strong evidence in favour of any trading rule or pattern on a large unrestricted scale.

Suggested Citation

  • G. Caginalp & H. Laurent, 1998. "The predictive power of price patterns," Applied Mathematical Finance, Taylor & Francis Journals, vol. 5(3-4), pages 181-205.
  • Handle: RePEc:taf:apmtfi:v:5:y:1998:i:3-4:p:181-205 DOI: 10.1080/135048698334637

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    References listed on IDEAS

    1. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
    2. Shiller, Robert J, 1981. "The Use of Volatility Measures in Assessing Market Efficiency," Journal of Finance, American Finance Association, vol. 36(2), pages 291-304, May.
    3. Rosenthal, Robert W., 1981. "Games of perfect information, predatory pricing and the chain-store paradox," Journal of Economic Theory, Elsevier, vol. 25(1), pages 92-100, August.
    4. T. Randolph Beard & Richard O. Beil, 1994. "Do People Rely on the Self-Interested Maximization of Others? An Experimental Test," Management Science, INFORMS, vol. 40(2), pages 252-262, February.
    5. Blume, Lawrence & Easley, David & O'Hara, Maureen, 1994. " Market Statistics and Technical Analysis: The Role of Volume," Journal of Finance, American Finance Association, vol. 49(1), pages 153-181, March.
    6. David Porter & Vernon Smith, 1994. "Stock market bubbles in the laboratory," Applied Mathematical Finance, Taylor & Francis Journals, vol. 1(2), pages 111-128.
    7. Brock, William & Lakonishok, Josef & LeBaron, Blake, 1992. " Simple Technical Trading Rules and the Stochastic Properties of Stock Returns," Journal of Finance, American Finance Association, vol. 47(5), pages 1731-1764, December.
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