The predictive power of price patterns

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 signiŽcance at the level of 36 standard deviations from the null hypothesis, and indicate a proŽt of almost 1% during a two-day holding period. An essentially non-parametric test utilizes standard deŽnitions of three-day candlestick patterns and removes conditions on magnitudes. The results provide evidence that traders are inuenced by price behaviour. To the best of our knowledge, this is the Žrst scientiŽc test to provide strong evidence in favour of any trading rule or pattern on a large unrestricted scale.