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On Candlestick-based Trading Rules Profitability Analysis via Parametric Bootstraps and Multivariate Pair-Copula based Models

Author

Abstract

This study analyses the profitability of candlestick-based technical trading rules in currency futures markets. The main feature of this type of technical analysis is that it generates signals based on the relationships between several price series, i.e. open, high, low and close prices. Since the trading rules are not precise and mainly based on causal knowledge of traders, we use a fuzzy-system to mathematize and classify them. The profitability of the trading rules is then tested by means of a bootstrap technique using a multivariate parametric model, in order to cope with the multivariate premise of the candlesticks. The model employs different time series, a nonnegative valued return (the absolute daily return), two non-negative valued ranges, one strictly positive range (the daily range) and a binary time series (the sign of the daily return). The multivariate distribution of the full model is constructed by means of a (Pair-)Copula approach, and we use a two-stage estimation method to identify its coefficients. The analysis is applied to data on British Pound, Swiss Francs and Japanese Yen futures prices from 1978 to 2013. The results show, that not all candlestick-based trading rules are profitable and only very few have a statistically significant predictive value in the analysed currency futures markets.

Suggested Citation

  • Andreea Röthig & Andreas Röthig & Carl Chiarella, 2015. "On Candlestick-based Trading Rules Profitability Analysis via Parametric Bootstraps and Multivariate Pair-Copula based Models," Research Paper Series 362, Quantitative Finance Research Centre, University of Technology, Sydney.
    • Handle: RePEc:uts:rpaper:362
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    References listed on IDEAS

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    More about this item

    Keywords

    Candlesticks; Technical Trading; Fuzzy-Systems; Parametric Bootstrap; Multiplicative Error Models; Pair-Copula; Futures Markets;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G1 - Financial Economics - - General Financial Markets

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