Technical analysis on Singapore stocks

Abstract

Though sometimes being criticized and judged against fundamental analysis and other hypothesis such as Efficient Market Hypothesis or Random Walk Theory, in reality, one cannot deny that technical analysis is widely used by many investors everyday.

In our study, we conduct a research to assess the profitability of 5 popular technical indicators: Moving Average, Moving Average Convergence Divergence, Relative Strength Index, Money Flow Index, and Stochastic Oscillator by applying them to 20 Singapore stocks over the period 1994 – 2007. First, it is found that after deducting transaction costs, these rules’ profitability is reduced substantially and may be outperformed by Buy & Hold, a passive trading strategy. When specifically evaluating trading signals, Stochastic Oscillator appears to be affected the most by a huge number of signals generated, which significantly erodes this rule’s profitability. Secondly, from Pearson correlation test, it is shown that when a particular stock does not perform as well as market, Relative Strength Index and Money Flow Index should be employed to take advantage of this circumstance. Last but not least, another finding from correlation test is that when stock volatility is high, Moving Average should be used to capture profits.

The recommendations drawn from our study will be helpful for investors in real market conditions.