The Effectiveness Of K-line Graph Technology In China's Stock Market

China's stock market is appealing to over millions of investors,contributing to the increasing popularity of stock market investment analysis among investors.The effectiveness of the investment analysis method draws eyes of investors considerably.In this case,equity investment analysis methods is generally divided into three categories: technical analysis,fundamental analysis and academic theory analysis.Among the three categories is the technical analysis that most favored by Chinese investors.As the most classic and attractive one,K-line graph functions as the foundation for investors to learn,process and integrate the ordinary market data,which in turn makes K-chart a necessity for each investor to manipulate.Based on the reasons above,K-line graph technology is favored by numerous investors in China's stock market,and profits hunters,with the assistance of K-line graph technology,dream of pursuing excessive profits.Therefore,whether the K-line graph technology is effective in China's stock market has become a so heated issue that most investors distribute time to it.It is of great practical significance to study the effectiveness of K-line graph technology.In addition,not only can researching on the validity of the K-line graph technology figure out whether there is a 'self-extinguishing law' in the securities investment method,but also can explore the market efficiency of China's stock market.Therefore,never should we ignore the theoretical significance of relevant research to the investment in stock market.The predecessors,holding various views and thus dividing into opposite parties,adopted methods and models differently,trying to enhance the validity of the K-line graph technology in the Chinese stock market.However,I,proficient in previous methods and conclusions,make some improvements on the research in respect to the perspective of reversal morphology.The innovations in this article are as follows:First,offering trend analysis and defining technical trends;Second,providing stop-loss rules and considering stop-loss,and considering the influence of those rules on the effectiveness of the K-line diagram technology;third,from the unique perspective of the reversal form of research,reasonably setting the reversal form information content.The third chapter is the modeling part of this article,divided into five sections totally.In the first section,eight common and practical reversal patterns of the Meteor line,the dark cloud top,the downward engulfing line,the dusk star,the hammer line,the piercing shape,the upward engulfing line,and the startstar are selected and summarized.Based on their characteristics respectively,reversal patterns are mathematically defined by the mathematical formula.In the second section,the trend,existing before the reversal signal appears,is defined technically and three scenarios are designed to define the trend.In section III,the total transaction costs,in the basis of actual situations,are determined accurately.In the fourth quarter,I designed two major trading strategies.The first one is based on the signals,in the indication of reversal pattern,to buy or sell,and then to sell or buy after one day,three days or five days;the second type of trading strategy is to make sale or purchase decisions based on the reversal pattern,according to the indication of selling signal.These four sections mentioned above structure the rough model of this article.In the fifth quarter,a rational stop loss strategy is designed for the eight major reversals.Integrated with stop loss rule,the rough model translates into a much more sophisticated one.Selecting data from Shanghai Stock Index,ranging from 2006 to 2017,the paper,using both the simple and complex models,empirically tests the effectiveness of the K-line graph technique.Four facts have been located.First,the single-day,three-day and five-day conditional yields based on the reversal pattern are all negative,and the accuracy of single-day,three-day and five-day reversal patterns is also lower than 44%.Second,with the sole exception of the two Venus-appearing days,the conditional return rates on the single-day,three-day and five-day conditions generated by the other seven reversal patterns are all negative,and the accuracy rate does not exceed 50%.Third,when adopting the second largest trading strategy,the conditional yield rate generated by the reversal pattern(before and after adding the stop-loss rule)is significantly lower than the return on investment in China's stock market.Fourth,considering a stop loss rule guarantees an increase in the conditional yield generated by the reversal pattern.Only via the discussion in this paper can three major conclusions be drawn.In conclusion,overall,the K-line graph technology,when being applied to investment in China's stock market,is ineffective.Regardless of which trading strategy is adopted,whether stop loss is considered or not as well as the conditional rate of return or the accuracy rate,the empirical results of the K-line graph are quite poor,indicating that the K-line graph technology in our stock market is not profitable.Second,the addition of stop loss strategy can effectively improve the conditional return rate in certain conditions,but it does not confirm that the K-line graph technique is effective.Thirdly,the ineffectiveness of the K-line graph technology reveals a weak-effective stock market in China,and it also verifies the law of self-destruction ofsecurities investment methods.Therefore,in our country's stock market,investors should not make investment decisions exclusively relying on K-line graph technology.Instead,it should be taken into account only in angle of reverse thinking.At the end of the article,I point out three drawbacks in the researching process of this paper.First,subjectivity regarding definition of technical trends exists.Second,this article only examines the K-line graph,lacking research on a variety of time scales,such as weekly charts and 60-minute chart,for K-line graphs.Third,space for future improvement in the technical definition of reversal patterns is still in existence.