The profitability of technical analysis: Evidence from the piercing line and dark cloud cover patterns in the forex market

Figures & data

Figure 1. Piercing line and dark cloud cover patterns.

Table 1. Summary statistics for the 24 currency pairs between 2000 and 2018

Pair	Total	Average	Median	75^th Percentile	25^th Percentile	Max	Min	Spread
EUR/USD	543,758	113	99	137	72	539	12.3	2.6
AUD/USD	429,957	89	76	108	55	748	4	4.1
USD/JPY	473,277	98	88	120	63	794	7	3.3
USD/CHF	547,637	113	99	143	68	1,886	6	4.1
GBP/USD	661,472	137	120	166	89	1,791	2	4.5
NZD/USD	401,264	83	73	101	54	516	9	5
USD/CAD	487,319	101	90	122	65	745	10	4.7
GBP/CAD	811,455	183	165	224	121	1,891	22	13.4
GBP/AUD	947,203	214	184	253	135	2,604	8	13.7
GBP/NZD	1,210,168	273	235	328	173	2,044	27	20
GBP/CHF	793,617	164	142	199	100	2,878	25	11.6
GBP/JPY	902,426	187	159	221	116	2,689	8	8.5
EUR/AUD	788,818	163	136	192	101	2,085	20	10.9
EUR/CAD	691,382	143	128	172	96	790	17	9.1
EUR/CHF	334,926	69	56	83	37	2,324	2	5.8
EUR/NZD	900,396	203	172	243	129	1,884	28	15.6
EUR/JPY	657,843	136	116	161	85	1,350	9	5
AUD/JPY	524,897	109	89	126	66	1,114	5	6.5
NZD/JPY	443,987	100	84	118	62	911	13	5.9
CHF/JPY	475,290	98	85	115	64	2,444	21	7.9
CAD/JPY	478,142	108	91	129	68	915	19	5.6
AUD/CAD	455,312	94	84	113	63	735	7	8.4
AUD/NZD	418,034	94	83	112	63	759	22	14.3
AUD/CHF	437,324	99	83	116	63	1,551	5	8.5

This table provides summary statistics for the 24 currency pairs between 2000 and 2018. The total represents the number of pips each pair changed calculated by taking the difference between the daily high and low. The other columns show the major statistics on a daily basis. The spread represents the average active tradable spread, which is the difference between bid/ask quotes. The US pairs with USD represent the major pairs, while other pairs are crosses.

Figure 2. Illustration of the piercing line and dark cloud cover pattern trades.

Table 2. Piercing line and dark cloud cover pattern results (1:1 reward/risk ratio)

Pair	Trades	Profitable	Unprofitable	Spread	Rollover $	Net pips	ADR $	TR %	Mean %	Max %	Min %	Std %
Panel A: Seven major pairs
EUR/USD	72	33	39	204	8.43	−739.15	−730.72	−73.07	−1.01	19.72	−18.56	10.23
AUD/USD	66	30	36	241.20	72.46	−1,701	−1,628.54	−162.85	−2.47***	26.89	−41.69	11.35
USD/JPY	77	40	37	261.50	−14.47	−1,010.75	−924.15	−92.41	−1.20	14.16	−30.89	9.63
USD/CHF	75	41	34	303.50	34.31	469.85	504.16	50.42	0.67	23.01	−23.65	10.72
GBP/USD	71	38	33	317	−7.17	807.6	800.43	80.04	1.13	24.49	−21.75	11.95
NZD/USD	75	33	42	378.2	68.38	−936.8	−868.42	−86.84	−1.16	25.20	−41.02	10.72
USD/CAD	76	40	36	335.3	2.06	869.55	697.70	69.77	0.92	24.04	−16.78	9.16
Total	512	255	257	2,040.7	164.01	−2,240.7	−2,149.53	−214.95	−0.45	26.89	−41.69	10.54
Panel B: The other 17 crosses
GBP/CAD	72	25	47	759.8	43.67	−3,202.45	−2,518.29	−251.83	−3.50**	24.87	−29.78	14.26
GBP/AUD	64	39	25	799.7	43.25	3,553.25	2,530.53	253.05	3.95	99.48	−43.51	20.63
GBP/NZD	58	29	29	1,053.3	−22.04	−317.55	−244.32	−24.43	−0.42	48.99	−64.58	21.48
GBP/CHF	79	42	37	952.4	−12.66	812.65	799.99	80	1.01	63.03	−41.47	18.76
GBP/JPY	70	34	36	626.4	50.51	−567.55	−460.28	−46.03	−0.66	46.12	−49.19	19.72
EUR/AUD	70	26	44	752	20.14	−3,041.00	−2,108.56	−210.86	−3.01**	31.36	−25.16	11.11
EUR/CAD	85	36	49	732.5	0.89	−608.55	−485.95	−48.59	−0.57	42.97	−27.04	12.18
EUR/CHF	57	31	26	332.4	−7.81	−203.75	−211.56	−21.16	−0.37	14.62	−25.07	8.34
EUR/NZD	70	38	32	899.9	50.88	899.50	680.53	68.05	0.97	42.33	−31.87	16.14
EUR/JPY	66	37	29	371.3	43.36	1,740.8	1,610.08	161.01	2.44	37.39	−28.19	13.16
AUD/JPY	62	31	31	397	61.31	−639.85	−514.56	−51.46	−0.83	36.64	−50.05	13.26
NZD/JPY	66	20	46	481.1	61.87	−3,261.00	−2,873.03	−287.3	−4.35*	24.66	−36.47	10.83
CHF/JPY	71	41	30	563.5	3.99	1,353.40	1,222.05	122.2	1.72	24.93	−19.60	9.7
CAD/JPY	68	30	38	367.6	24.15	−456.20	−386.43	−38.64	−0.57	41.75	−27.97	11.82
AUD/CAD	58	32	26	464.2	26.60	415.05	358.64	35.86	0.62	12.40	−13.54	7.07
AUD/NZD	55	27	28	695	20.88	17.70	33.27	3.33	0.06	24.07	−20.00	7.92
AUD/CHF	69	39	30	420.4	−27.75	287.45	259.7	25.97	0.38	25.41	−50.92	12
Total	1,140	557	583	10,668	381.24	−3,218.1	−2,308.2	−230.82	−0.18	99.48	−64.58	13.43
Total	1,652	812	840	12,709	545.25	−5,458.8	−4,457.72	−445.77	−0.32	99.48	−64.58	11.99

The table shows the results for the 24 currency pairs using the 1:1 reward/risk ratio. Panel A shows the seven major pairs and Panel B shows the 17 crosses. The variables from the left to the right columns are as follows: Trades represent the total number of trades for each pair based on the piercing line and dark cloud cover pattern detection that satisfies the conditions of equations (2)(2) and (3(3) ), respectively. Profitable is the number of trades that hit the target. Unprofitable are trades that hit the stop/loss. The spread represents the first component of transaction costs (the bid/ask quote difference) that the forex broker receives. The rollover is the interest rate differential between the two currencies, which represents the second component of transaction costs measured in US dollars. Net pip is the difference between the won pips from profitable trades and lost pips from unprofitable trades after the spread. ADR represents the adjusted US dollar return, which is the net income from trading starting with a 1,000 USD investment and using only a 10% margin. TR represents the total return (percentage) calculated as in equation (9)(9) . The mean (percentage) represents the average transactions’ returns. Max and min show the maximum and minimum transaction returns (percentage), respectively. Std is the standard deviation of transaction returns (percentage).

***, **, and * are the significance levels at 10%, 5%, and 1%, respectively.

Table 3. Piercing line and dark cloud cover pattern results (2:1 reward/risk ratio)

Pair	Trades	Profitable	Unprofitable	Spread	Rollover $	Net pips	ADR $	TR %	Mean %	Max %	Min %	Std %
Panel A: Seven major pairs
EUR/USD	75	21	54	207.7	5.58	−1,317.5	−1,311.87	−131.19	−1.75	39.36	−20.92	15.09
AUD/USD	67	16	51	244.7	116.15	−3,119	−3,002.85	−300.28	−4.48*	23.38	−42.69	13.25
USD/JPY	77	25	52	261.5	−22.61	−1,813.3	−1,654.58	−165.46	−2.15	26.79	−31.79	13.09
USD/CHF	79	26	53	317.7	68.87	−322.65	−253.78	−25.38	−0.32	49.16	−24.65	16.19
GBP/USD	72	31	41	317.9	−25.58	3,725.15	3,699.57	369.96	5.14**	50.22	−18.41	20.07
NZD/USD	76	24	52	382.7	89.97	−409.6	−319.63	−31.96	−0.42	53.31	−42.02	15.79
USD/CAD	77	31	46	337.7	−7.32	2,564.15	2,044.00	204.4	2.65	49.68	−17.58	15.47
Total	523	174	349	2,069.9	225.06	−692.7	−799.14	−80	−0.19	53.31	−42.69	15.56
Panel B: The other 17 crosses
GBP/CAD	75	23	52	759.8	33.39	−1,135.5	−875.01	−87.5	−1.17	51.36	−30.58	21.03
GBP/AUD	64	28	36	799.7	691.51	5,307.4	4,406.69	440.67	6.89**	200.34	−44.21	38.26
GBP/NZD	59	23	36	1,073.9	−6.73	2,222.6	1,549.09	154.91	2.63	85.28	−65.28	31.08
GBP/CHF	80	27	53	952.7	−3.49	−119.95	−123.44	−12	−0.15	110.5	−68.26	28.14
GBP/JPY	70	24	46	626.4	212.24	817.85	948.31	94.83	1.35	95.71	−55.38	30.28
EUR/AUD	72	21	51	772	96.28	−2,605.2	−1,727.36	−172.74	−2.4	37.14	−30.5	14.89
EUR/CAD	85	22	63	732.5	13.54	−427.2	−328.22	−32.82	−0.39	87.83	−27.84	19.62
EUR/CHF	57	23	34	332.4	−8.84	376.85	368.01	36.8	0.65	31.29	−26.07	12.61
EUR/NZD	71	24	47	940.1	95.55	−927.6	−553.77	−55.38	−0.78	70.62	−40.11	22.93
EUR/JPY	67	26	41	371.9	98.07	1,392.2	1,351.05	135.11	2.02	50.5	−30.19	19.86
AUD/JPY	62	24	38	397	144.49	294.85	409.86	40.99	0.66	74.25	−50.95	19.45
NZD/JPY	67	12	55	501.4	25.68	−3,582.3	−3,198.39	−319.84	−4.77*	51.48	−37.37	14.61
CHF/JPY	72	26	46	566	0.52	1,324.4	1,192.48	119.25	1.66	51.68	−20.5	16.17
CAD/JPY	68	21	47	367.6	38.46	257.5	270.21	27.02	0.4	84.35	−28.87	19
AUD/CAD	59	14	45	1,598.3	79.83	−1,686.9	−1,269.69	−126.97	−2.15***	22.9	−14.34	9.75
AUD/NZD	56	18	38	713.4	51.23	215.95	202.40	20.24	0.36	49.83	−20.7	12.72
AUD/CHF	69	27	42	420.4	2.79	850.55	853.34	85.33	1.24	38.07	−51.92	17.38
Total	1,153	383	770	11,925.5	1,564.53	2,575.5	3,475.55	347.56	0.35	200.34	−68.26	20.46
Total	1,676	557	1,119	13,995.4	1,789.59	1,882.8	2,676.42	267.64	0.08	200.34	−68.26	18.01

This table shows the results for the 24 currency pairs using the 2:1 reward/risk ratio. Panel A shows the seven major pairs and Panel B shows the 17 crosses.

***, **, and * are the significance levels at 10%, 5%, and 1%, respectively

Table 4. Piercing line and dark cloud cover pattern performance over time and across currencies

	$US	$US	€	€	¥	¥	£	£	Swiss f	Swiss f	$C	$C	$AU	$AU	$NZ	$NZ	All	All
Year	TR	µ	TR	µ	TR	µ	TR	µ	TR	µ	TR	µ	TR	µ	TR	µ	TR	µ
2000	90.8	3.8	137.1	8.1	44.2	3.2	32.2	4.6	34.3	2.6	9.1	1.8	31.8	2.9	−13	−2.6	366.4	3
2001	−8.8	−0.3	−13.8	−1.1	−155.2	−8.6	−146.4	−13.3	−154.5	−22**	52.3	5.2	−27.6	−2.5	−5.5	−1.4	−459.5	−5.5***
2002	−37	−1.2	96.9	4.2	11.2	0.5	186.9	8.9	186.7	6.7	20.2	0.9	−0.9	0.0	59.4	4.2	523.4	3
2003	−66	−1.9	76.1	3.5	95.6	3.1	328.1	10.9	−58.9	−2.2	137.9	5.4***	141.6	5.7	112	10.2	766.3	4.3**
2004	11.5	0.6	114.2	5.0	125.9	5.5	−46.7	−2.5	−4.1	−0.3	−136	−4.9	94.5	3.9	61.5	5.1	220.7	1.6
2005	12.5	0.5	135.1	6.8	−13.4	−0.5	23.5	1.1	52.5	2.6	0.4	0.0	−27.1	−1.2	63.3	2.8	246.6	1.5
2006	41.2	2.6	−9	−0.7	70.1	7	117.3	7.8	−20.3	−3.4	22.2	1.6	−48.3	−4.0	9.7	0.9	182.8	1.5
2007	122.2	3.7	−18.9	−0.6	427.9	9.1	195.8	7.3	−68.8	−3.8	54	1.6	−0.9	0.0	47.8	1.6	759.1	2.4
2008	141	5.9	−269.5	−14.2*	−166.1	−5.2	75	2.9	−121.4	−6.4	219.7	13.7**	51.6	1.9	−26.2	−1.2	−95.9	−0.3
2009	2.6	0.1	44.4	2.1%	82.7	3.4	67.1	3.1	−55.6	−4	54.5	3.2	−204	−10.2*	−23.9	−1.0	−32.1	−0.4
2010	−136.5	−5.3	−175.5	−7.6**	32.6	1.4	203.1	10.2	27.8	1.7	−48.9	−3.1	−58.9	−2.6	−42.2	−3.2	−198.4	−1.1
2011	−74.4	−2.3	−169.7	−7.7**	74.9	3.1	−227.2	−7.6***	−92.2	−3.2	26.5	1.1	53.8	2.7	−118.7	−7.9	−526.9	−2.7
2012	44.6	1.8	50.2	1.6	−128.7	−3.7***	−70.2	−2.7	−17.7	−1.3	−51.9	−2.5	37.2	1.3	−42.6	−1.8	−179.2	−0.9
2013	39.6	1.0	−14.7	−0.5	−50.4	−1.9	−39.7	−1.5	84	4.4	42.3	1.7	−6.9	−0.2	−58.5	−2.1	−4.5	0.1
2014	−204.8	−5.7**	−35.5	−1.7	7.4	0.3	−11.9	−0.5	−146.4	−7*	−79.6	−4.2**	−64	−3.8	−13.6	−1.1	−548.3	−3
2015	95.9	3.8	11.4	0.5	−37	−1.3	264.9	13.9**	349.6	18.4*	−43.6	−4.8	44.9	1.9	−11	−0.6	675.1	4
2016	−78.5	−6.5	−86.3	−4.5	−86.9	−4.1	−9.1	−0.4	−49.8	−2.3	−36.2	−2.8	−17.5	−0.7	28.7	1.5	−335.5	−2.5
2017	−56.4	−1.4	−114.3	−3.6	−7.1	−0.2	−68.7	−2.5	−25.4	−0.9	−113.2	−4.6***	−16.4	−0.6	−125.9	−5.2**	−527.3	−2.4
2018	−0.1	0.0	95.2	4.3	−43.3	−2.9	141.5	5.4	71.4	3.2	55.7	3.3	73.5	2.3	57.7	2.7	451.6	2.3***
Total	−60.6	0.0	−146.7	−0.3	284.4	0.4	1015.6	2.4	−8.9	−0.9	185.4	0.7	56.2	−0.2	−41.1	0.0	1284.4	0.3

This table shows the pattern results from 2000 to 2018 and across currencies. $US represents the outcomes for all US pairs, which includes the seven majors. € includes all the euro pairs. ¥ includes all the yen pairs. £ includes all the pound pairs. Swiss f includes all the Swiss franc pairs. $C includes all the Canadian dollar pairs. $AU includes all the Australian dollar pairs. $NZ includes all the New Zealand dollar pairs. All include all eight currencies. TR represents the total return calculated as in equation (9)(9) . µ represents the mean return of transactions.

***, **, and * are the significance levels at 10%, 5%, and 1%, respectively.

Table 5. Pre- and post-crisis analyses

Pair		Pre-crisis			Post-crisis
	Spread	Volatility	Return µ	Spread	Volatility	Return µ
EUR/USD	2.07	1.10	0.01	3.16	1.00	−0.07
AUD/USD	4.39	0.84	−0.02	4.15	0.82	−0.04
GBP/USD	4.10	0.98	0.07	5.73	1.38	0.03
NZD/USD	5.02	0.68	0.02	6.20	0.88	−0.02
USD/CAD	4.70	0.84	0.02	5.20	1.13	0.00
USD/CHF	4.10	1.70	−0.02	4.75	1.29	−0.01
USD/JPY	3.87	1.09	−0.07	3.85	1.12	0.03
USD portfolio	4.10	1.05	0.003	4.58	1.05	−0.003
EUR/USD	2.03	1.07	0.00	3.16	1.00	−0.07
EUR/AUD	9	1.20	−0.03	9.54	0.94	−0.02
EUR/CAD	9.92	1.28	0.04	9.33	1.07	0.02
EUR/CHF	6.30	0.97	0.03	7.82	0.84	−0.02
EUR/NZD	8.90	1.21	−0.01	17.25	0.85	0.02
EUR/JPY	4.07	1.09	0.03	8.06	0.92	−0.02
EUR portfolio	7.78	1.15	0.01	9.28	0.94	−0.02

The table shows the analysis for the US dollar and euro portfolios in the pre- and post-crisis periods. The pre-crisis period for the US dollar is from 2000 to 2006 and the post-crisis period is from 2007 to 2018. For the euro, the pre-crisis period is from 2000 to 2008 and the post-crisis period is from 2009 to 2018. The spread is the difference between the bid/ask quotes in pips. Volatility % is calculated for each pair as the mean size of the candle over the entire period. Mean return % is the average return per transaction.