Do Japanese candlesticks help solve the trader’s dilemma?

In this paper, we investigate whether Japanese candlesticks can help traders to find the best trade-off between market timing and market impact costs. Based on fixed-effect panel regressions on a sample of 81 European stocks, we show that implicit transaction costs are better characterized by using...

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Bibliographic Details
Published in:Journal of banking & finance 2014-11, Vol.48, p.386-395
Main Authors: Detollenaere, Benoit, Mazza, Paolo
Format: Article
Language:English
Subjects:
Costs
Eastern Europe
Economic theory
International finance
Investment analysis
Japan
Japanese candlesticks
Liquidity
Market impact
Market theory
Market timing
Personal finance
Regression analysis
Securities trading
Simulation
Studies
Tradeoff analysis
Transaction costs
Western Europe
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Summary:In this paper, we investigate whether Japanese candlesticks can help traders to find the best trade-off between market timing and market impact costs. Based on fixed-effect panel regressions on a sample of 81 European stocks, we show that implicit transaction costs are better characterized by using specific Japanese candlesticks patterns. Although market timing costs are not lower when Hammer-like and Doji configurations occur, market impact costs are significantly lower when and after a Doji structure occurs. We further check the potential gains through order submission simulations and find that submission strategies based on the occurrence of Doji result in significantly lower market impact cost than random submission strategies. These findings are of great interest for investors who look for occasional liquidity pools to execute their orders inexpensively such as institutional traders or hedgers.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2013.03.013