The Efficacy of Relative Strength Index (RSI) in KLSE Market Trade
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Abstract
The Relative Strength Index (RSI) is a widely used technical indicator in stock trading because of its simple application. However, its application combined with fundamental analysis in Kuala Lumpur Stock Exchange (KLSE) is yet to be explored extensively. Hence, this study aimed to investigate the effectiveness of RSI as a predictive tool in the KLSE market. First, 39 stocks that met the set of criteria guided by fundamental soundness were identified. Trading signals are then initiated based on the RSI indicators, which are superimposed on the charts of the identified stocks. The return on investment (ROI) was then estimated and benchmarked against KLCI performance over a period of five years starting from 21st July 21, 2018. It was found that the average ROI was 3.46% against KLCI’s -24.37% over the same period of 5 years, measured between 21st July 21, 2018, 21st July 21, 2023. The average ROI improves as the number of trade iterations increases to five. The peak average ROI is approximately 22%. Technology is the top performer, recording an ROI of more than 40%. In conclusion, the combination of RSI and fundamental analysis yielded a mixed set of results. Although it outperforms KLCI, the annualised ROI is only slightly above 4%. Nevertheless, the results of this study provide valuable insights into the application of the RSI as a trading signal generator in the KLSE market.
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