||The Predictive Power of Single-Line Patterns of Candlestick Charting: Evidence from the Taiwan Stock Market
||Department of Business Administration
Taiwan stock market
Candlestick technical analysis is an old trading technique that tracks the short-term price movements by employing the relationship between open, high, low, and close prices. The purpose of this thesis is to examine the predictive power of candlestick trading strategies by using the Taiwan 151 component stocks daily data for the period from 2 January 1992 to 31 December 2009. The main contribution of this thesis is using a four-price-level approach to categorize the single-line patterns constructed by candlestick charting in a systematical manner. The approach adopted in this thesis permits us to release for the limitation of recognition in a manner not previously possible. Moreover, we not only consider transaction costs and risk but also mitigate data-snooping problems conscientiously by several appropriate methods, including the bootstrap methodology and sub-sample and out-of-sample tests. We find evidence that four patterns are profitable for the Taiwan stock market after transaction costs, including one bullish pattern and three bearish ones.
List of Tables VI
List of Figures VII
Chapter 1 Introduction 1
1.1 Motivation 1
1.2 Purpose 7
1.3 Main Contributions 9
1.4 Research Framework 10
Chapter 2 Literature Review 12
2.1 Technical Analysis 13
2.2 Candlestick Charting 18
Chapter 3 Theory and Methodology 24
3.1 Related Theories 24
3.1.1 Principle of Supply and Demand 24
3.1.2 Principle of Behavioral Finance 26
3.2 Related Methodologies 29
3.2.1. Skewness Adjusted t-statistic 29
3.2.2. Out-of-sample Test 29
3.2.3. Bootstrap Methodology 31
Chapter 4 Data and Research Design 33
4.1 Data 33
4.2 Research Design 36
4.2.1 Categorizing Patterns 37
4.2.2 Identifying Trends 41
4.2.3 Calculating Profits 42
4.3 Treatment of Transaction Costs and Risk 43
Chapter 5 Empirical Results 45
5.1 In-sample Results 45
5.2 Bootstrap Results 53
5.3 Out-of-sample Results 56
5.4 Sensitivity Analysis 58
Chapter 6 Conclusion 60
Appendix: The 151 Sampling Stocks 71
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