The Classification of Candlestick Charts: Laying the Foundation for Further Empirical Research

Abstract

The academic discussion about technical analysis has a long tradition, in American literature as well as in the German scientific community. Lo et al. (2000) laid the foundation for empirical research on the “classical” technical indicators (like “head-and-shoulders” formations) with their paper “Foundations of Technical analysis”.

The candlestick technique is based on the visual recognition of patterns called “Candlesticks”, a special method of visualizing the behavior of asset prices. Candlesticks are very popular in Asia and their popularity is growing in western countries. Until now there has not been done much empirical research concerning the performance of technical analysis with candlesticks. This is probably due to the fact that no automatic and deterministic way to classify candlestick patterns has been developed thus far.

The purpose of this work is to lay the basis for future empirical investigations and to develop a systematic approach by which candlestick charts can be classified.