Is Morning Star candle stick pattern accurate in Hong Kong Stock Investment ?

Morning star is composed of 3 candle sticks. There should be a downward trend before the pattern happens. When the first long black candle exists, a short bodied candle whose body gaps below the first candle appears in the following day. The third candle is long and white. It gaps above the body of the second candle and closes at least 50% into the body of the first candle. If the second candle is a doji whose open and close are very close, the pattern is called Morning Doji Star.

In order to examine the performance of Morning Star in Hong Kong stock investment, I use the following settings in the simulation :

• 1319 daily stock data from 1/1/2000 to 31/5/2013 downloaded from Yahoo
• The downward trend is weakly defined in the simulation with AroonOsc(14) < -5
• Buy at the open price of tomorrow once the pattern is found. Stop and take profit immediately at the stop loss and target price. If there is gap, stop and take profit immediately at the gap open price.
• An 500K initial capital divided into 5 equal portions. If there is a profit, the equity increases and the investment capital of each portion is proportionally increased. If there is a loss, vice versa. The maximum number of stock symbols held is 5.
• 100 sets of stop losses and target prices, basically stop loss from 2% to 10% in a step of 2%, the target price from 5% to 100% in a step of 5%.
• 0.375% commission and stamp fee for each transaction, i.e. 0.75% for a buy and a sell transaction.

	Annual Return	Max Drawdown	Number of Trades	Success Rate	Best combination of Stop Loss and Target Price
Morning Star	14.1%	-49.3%	189	14.6%	6% stop loss, 80% target price
Morning Doji Star	15.0%	-38.9%	240	15.0%	4% stop loss, 75% target price

Conclusion :

Morning Star and Morning Doji Star perform well in Hong Kong Stock investment. However, the target price should be set to about 75% to 80% and the stop loss is about 4% to 6%. Therefore, the success rate is as low as about 15% and the drawdown is also not small in the period from 2000 – 2013.