Testing the efficacy of candlestick patterns

[sebastianrandlearr]

Hello,

I hope that someone might be able to give me some ideas regarding the following;

My brother has a dissertation to do and his idea is to test the efficacy of various candlestick patterns as a reversal signal. He is trying to figure out a way to statistically verify whether the candlestick patterns that he tests show greater short term strength than randomly buying the market.

[slgzlujw15]

I.e. Do candlestick reversal patterns produce better returns at the bottom of a trend than randomly buying at the bottom of a trend.

His current plan is to run a couple hundred tests where he randomly buys a 10 day low...he will then average out the 5 and 10 day % returns of the closed positions.

[Spoliossy]

He will then run another couple hundred tests and randomly buy each of the candlestick patterns tested if they are also at a 10 day low. Again he will average out the 5 and 10 day % returns of the closed positions.

If the average 5 and 10 day returns of the patterns are better than the average 5 and 10 day returns of randomly buying...is that adequate to suggest that the patterns have a 'predictive' quality?

[Stouneda]

I am curious to know whether there would be a better way of doing things and I hoped that the fine folks on this forum might be able to give better ideas of how one might do such a test.

[tcij5nqd]

If it matters, the tests will be on 10 years of data that includes all stocks currently listed on the Nasdaq and NYSE.

Thanks in advance for your help.