i started running simulations to see the likelihood of certain stock patterns having an indication on future price.
i got a book on japanese candlesticks, where the guy purports that hangman is quite the accurate indicator.
i ran an experiment. the details are below. the link is of a pdf of 100s of graphs with hangmen. i'm wondering if anyone can tell me why i'm getting a 50% success rate (like flipping a coin).
also, if anyone feels that there are more accurate indicators that i should be studying, i'd be interested to hear what they are.
(forum is not allowing me to post my pdf)
An experiment was done to find hanging men in 2010, as defined above (shadow 2.5x length of stick or more; candle at top; almost no top shadow). After the hanging men were found, the trend before the hanging man (hanging man close minus(-) close of 5 days before) was compared to the trend after (five days after minus hanging man close); only the signs (+ or -) of the two trends were compared. All stocks listed on the NYSE were compared.
It was found that the likelihood of a trend reversal following a hanging man was about 50%. In other words, under these conditions, a hanging man was about as reliable as tossing a coin.
Figures can be found in the spreadsheet on sheet '001'.
Suggestions for further study:
1) Test if the color of the candlestick provides any more reliability. (Although the real body of the hammer or hanging man can be white or black, it is slightly more bullish if the real body of the hammer is white, and slightly more bearish if the real body of the hanging man is black. "Japanese Candlestick Charting Techniques" Steve Nilson, p.29) So, if the initial trend is down, close>open. If the initial trend is up, close<open.
2) Test the strength of the trends. For example, any preceding (since the goal is forecasting) trend less than a 2% change or more than a 5% change might be thrown out.
3) Lengthen the lower shadow.
repeated with a longer tail (3.5x). results were the same.
Only hangmen with bullish candles were counted as trend reversals for downtrends, vice versa.
about the same as a coin toss.
test strength of prior trend. (2%-5%).
repeat criteria in 3 and 4 and extended tail (5.5x) and change strength test (1.9%-3%).
still may as well be flipping a coin.
confirmation - will a open price lower (on the day after) than the close of the hangman day tend to confirm a price 5 days later?
"the general principle for the hanging man;
the greater the down gap between the real body of the hanging-man day and the opening the next day the more likely the hanging man will be a top.
Another bearish verification could be a black real body session with a lower close than the hanging-man sessions close."
no strength test. tail=3.5x. only for bearish trend reversals. does a lower open on the second day confirm the hangman?
same criteria as 006, but lower open of 97% or less of the close.
The previous experiments indicate that a hangman is about as reliable as a coin flip for determining the direction of 5 day trends.
100 random stocks were picked from the NYSE and analyzed for 2010(year) hangmen. All were charted to see if a human being might detect some pattern.