Soldiers, pigeons and shooting stars: Evaluating the profitability of candlestick charting on the Stockholm Stock Exchange

Sammanfattning: This study provides a systematic evaluation of the profitability of candlestick charting, the oldest known form of technical analysis, on a sample of 72 stocks listed on the Stockholm Stock Exchange over the period 2000-2015. In contrast to recent studies on Chinese, Taiwanese and US data, we find that the majority of candlesticks generate raw returns that are only moderately positive and not statistically significant after accounting for transaction costs of 0.10%. Performance is also poor on a risk-adjusted basis as most candlesticks produce negative four-factor alphas. The results are robust across two different trend definitions (three day simple moving average and ten day exponential moving average), two exit strategies (Caginalp-Laurent and Marshall-Young-Rose) and four holding periods (one, two, three and ten days). While a few candlesticks have both statistically and economically significant alphas that to some extent can be explained by successful market timing ability, their performance is not consistent across trends, holding periods nor over time. We additionally demonstrate that the profitability of candlestick charting has largely deteriorated in recent years, supporting the notion that the market has become more efficient in the weak form sense. We therefore conclude that candlestick investors are unlikely to make profits on the Stockholm Stock Exchange.