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Is candlestick charting an effective trading tool in timing the markets?
Your questions In the world of technical analysis, is candlestick charting an effective trading tool in timing the markets? It depends on how you define effective. But as a standalone and systematic strategy, it tends not to be profitable. See for example Market Timing with Candlestick Technical Analysis: Using robust statistical techniques, we find that candlestick trading rules are not profitable when applied to DJIA component stocks over 1/1/1992 – 31/12/2002 period. Neither bullish or bearish candlestick single lines or patterns provide market timing signals that are any better than what would be expected by chance. Basing ones trading decisions solely on these techniques does not seem sensible but we cannot rule out the possibility that they compliment some other market timing techniques. There are many other papers that come to the same conclusion. If used correctly, how accurate can they be in picking turning points in the market? Technical analysts generally fall into two camps: (i) those that argue that TA can't be fully automated and that interpretation is part of the game; (ii) those that use TA as part of a systematic investment model (automatically executed by a machine) but generally use a combination of indicators to build a working model. Both groups would argue (for different reasons) that the conclusions of the paper I quoted above should be disregarded and that TA can be applied profitably with the proper framework. Psychological biases It is very easy to get impressed by technical analysis because we all suffer from "confirmation bias" whereby we tend to acknowledge things that confirm our beliefs more than those that contradict them. When looking at a chart, it is very easy to see all the occurences when a certain pattern worked and "miss" the occurences when it did not work (and not missing those is much harder than it sounds). Conclusions