Backtesting RSI Trading Rules

UCD Michael Smurfit Business School
CAPITAL MARKETS AND INTRUMENTS (CMI) FIN41350

Empirical Review Group Project Report
Relative Strength Index Indicator
Pham Minh Tung
Statement
We declare that all material included in this project is the end result of our own work and
that due acknowledgement has been given in the bibliography and references to all
sources be they printed, electronic or personal
Contents
Part I: Introduction and background ............................................................................. 3
1. Background and motivation .................................................................................. 3
2. Trading rule Relative Strength Index (RSI) ...................................................... 3
3. Our portfolio............................................................................................................ 4
4. Assumptions............................................................................................................. 5
The trading strategy contains only optimized trading rule .................................... 5
The interest rate and interest margin is constant for the whole time frame ......... 5
Trading on margin allowed ..................................................................................... 6
Initial balance and risk averse ................................................................................ 6
Part II: Economic effect ................................................................................................... 7
1. The optimization ..................................................................................................... 7
2. Income without friction cost ................................................................................ 10
3. Income with friction cost ...................................................................................... 11
Part III: Statistical effect ................................................................................................ 13
1. Income volatility and risk ..................................................................................... 13
2. Can we beat the market? ...................................................................................... 16
Part IV: Conclusion and recommendation ................................................................... 17
Appendix 1: Singapore Interest Rates and Interest Margin ....................................... 18
Appendix 2 Income without friction cost ................................................................... 23
3 month sub periods income generated, RSI (15) ............................................ 23
Appendix 3: Income with friction cost of 2% ............................................................... 27
12 month sub periods income generated, RSI (18) .......................................... 30
References ........................................................................................................................ 31
Part I: Introduction and background

1. Background and motivation
The background theory for our project is the weak form of market efficiency. Efficient
market hypothesis (EMH), formulated by Eugene Fama in 1970, suggests that at any given
time, prices fully reflect all available information on a particular stock and/or market
therefore, it is unrealistic for traders to outperform the market. In other words, agents
cannot predict the movement of stock price, thus no one can out profits the others.
EMH consists of 3 forms: weak, semi strong and strong. Theoretically, if the weak form
of efficient market exists, technical analysis cannot be used to predict and beat the market.
Sometimes this form is rejected, however, the magnitudes of inefficiency are very small
relative to friction costs. According to Fama and Blume (1996), Brock, Lakonishok and
LeBaron (1992), a variety of trading rules failed to exploit the inefficiency in the US stock
market.
Motivated by these studies, we decided to retest this form of market efficiency by using
technical analysis to see whether or not we can exploit profits and outperform the market.
Nonetheless, our studies will only cover one single trading rule which is quite famous and
easy to implement Relative Strength Index (RSI).
2. Trading rule Relative Strength Index (RSI)
The Relative Strength Index (RSI), developed by J. Welles Wilder, is a momentum
oscillator indicator that reflects the speed and fluctuation of price changes. The parameter
ranges from 0 to 100. Normally the stock is considered oversold and overbought when RSI
line reaches the lower zone below 30 and the upper zone above 70 respectively.
The RSI indicator is calculated on the default 14 periods (can be days, weeks, months,
etc). In this paper we will use daily frequency as the input parameter.
Computation of RSI parameter:
100
= 100 1+
(1.2.1)
RS = Average Gain / Average Loss
(1.2.2)
To simplify the calculation explanation, RSI has been broken down into its basic
components: RS, Average Gain and Average Loss on the basis of 14 periods. Losses are
expressed as positive values, not negative values.
The very first calculations for average gain and average loss are simple 14 period averages.
-
First Average Gain = Sum of Gains over the past 14 periods / 14.
(1.2.3)
First Average Loss = Sum of Losses over the past 14 periods / 14
(1.2.4)
The second, and subsequent, calculations are based on the prior averages and the current
gain loss:
-
Average Gain = [(previous Average Gain) x 13 + current Gain] / 14
(1.2.5)
Average Loss = [(previous Average Loss) x 13 + current Loss] / 14.
(1.2.6)
Following the RSI indicator, we obtain a sell signal when the parameter is above 70 and a
buy signal when the parameter is below 30. After receiving the signals, we will execute the
sell order when the RSI line moves down and out of the upper zone. The same concept is
applied for executing buy order.
3. Our portfolio
We decide to test this trading rule on Singapore Strait Times Index STI (Bloomberg Ticker:
FSSTI) in the time frame of 2000 2013. The Straits Times Index is calculated and
disseminated by FTSE, comprises the top 30 SGX Mainboard listed companies on the
Singapore Exchange selected by full market capitalization.
Using an index simplifies the portfolio construction for passive trading strategy which
requires a well diversified one. Since this index is computed by industry experts and it
represents the health of Singapore economy, we have the guarantee of the necessary
diversity.
4
Some experts believe that market indicators like RSI is not suitable for markets with high
volatility due to the large amount of false signals generated, which is not good for the
effective utilization of this indicator. It is advisable that less volatile asset like S&P 500
Index should be used in this case. However, this index has been experimented many times
by traders and scholars, therefore we decide to choose a less famous index which has the
same level of volatility as S&P 500 and FSSTI is a quite satisfied one. The table below
shows the standard deviation of daily return from S&P 500 and FSSTI.
Index
Time frame
Frequency
Income volatility
S&P 500
2000 2013
Daily
1.12%
FSSTI
2000 2013
Daily
0.68%
Source: Group estimates

4. Assumptions
To build a successful active trading strategy we need to arm ourselves with techniques such
as using limit or stop order, hedging and diversifying our portfolio with other asset classes
and derivative securities. However, in order to simplify our calculation as well as to gain a
thorough understanding about the trading rule, we have created an experimental
environment with several assumptions.
The trading strategy contains only optimized trading rule
We do not use any other techniques mentioned above alongside with the trading rule. We
aim to isolate the impact of the trading rule to see whether or not it is a good one. However,
we do some optimizations to the input parameters of the calculation to find out the most
profitable combination.
The interest rate and interest margin are constant for the whole time frame
We assume that the interest rate and interest margin (lending rate borrowing rate) are
constant through the whole time frame. The time frame of 14 years is divided by 3 different
sub period lengths: 3 months, 6 months and 12 months. Therefore we have corresponding
56 3 month sub periods, 28 6 month sub periods and 14 12 month sub periods.
The interest rate and interest margin are computed based on the statistics of the Monetary
Authority of Singapore (http://www.mas.gov.sg/). We use the average value of interest
rates and interest margin as our input parameters for the calculation of income generated.
Appendix 1 provides sufficient information of the historical data of Singapore interest rate
as well as interest margin for the chosen time frame.
The table below shows the corresponding interest rates and interest margin for different
windows.
Window
Interest rate
Interest margin
3 month sub period
0.56%
4.84%
6 month sub period
0.71%
4.69%
12 month sub period
0.92
4.49%

Trading on margin allowed
We consider these below margin requirement for margin trading:
-
Long initial
: 100%
Long maintenance
: 0%
Short initial
: 150%
Short maintenance
: 150%
Initial balance and risk averse

Our initial balance for investing is 10,000 euros and we assume that high level of risk is
not accepted, therefore the default amount of money spent on each trade is only 20% of
our available equity.
Part II: Economic effect

For the calculation of economic effect, we use MetaStock, software developed by Equis
International, to build the indicator and to back test the trading rule on the chosen time
frame.
The codes for performing order execution following RSI are below:
-
Buy order/Buy to cover order : Cross( RSI(opt1), 30 )
Sell order/Sell short
: Cross( 70, RSI(opt1))
Opt1 is the optimized number of periods (days) used in RSI computation.

1. The optimization
Obviously, we cannot use the same setting of RSI for different markets. Each market has
its own characteristics, therefore requires a different configuration for the best result. The
shorter the period, the more sensitive to price RSI becomes.
We have performed several tests and calculations to find out the best period for RSI. We
set a range from 6 to 24 for Opt1 to drift on. We also set 1 day for each drift. The results
are not consistent between different windows, thus consolidates our belief that we should
use different configuration for different markets and trading periods.
For 3 month sub periods, RSI trading rule calculated on 15 day period (RSI (15))
generates highest income. Meanwhile, for 6 month sub periods and 12 month sub
periods are RSI (14) and RSI (8) respectively. From the result, it can be assumable that for
FSSTI, the shorter the trading period, the less volatility from the stock price, thus RSI
period is longer. Nonetheless, it is not our goal to prove that theory, the result will only
help us saving time and effort by picking up the most efficiently optimized RSI for the test
against the passive trading strategy.
17
19
-0.33%
18
20
21
22
23
-0.74%
16
-0.91%
13
-0.69%
12
-0.75%
11
-0.26%
-0.06%
15
0.05%
14
-0.42%
-0.21%
10
-0.20%
0.15%
0.11%
-0.70%
-0.12%
-0.02%
0.18%
0.29%
0.51%
12 - MONTH SUB - PERIOD AVERAGE RETURN
24
16
17
18
19
21
22
23
0.06%
20
0.00%
0.37%
0.26%
13
0.10%
12
0.09%
11
0.11%
10
0.41%
15
0.43%
0.47%
0.48%
8
0.00%
0.00%
7
-0.08%
14
0.27%
0.22%
0.01%
0.19%
0.33%
6 - MONTH SUB - PERIOD AVERAGE RETURN
24
15
18
20
21
22
23
0.09%
19
0.06%
17
0.20%
16
0.10%
14
0.10%
13
0.07%
12
0.11%
11
0.12%
10
0.17%
0.21%
9
0.17%
0.05%
0.05%
-0.01%
-0.01%
0.01%
0.07%
0.17%
0.15%
3 - MONTH SUB - PERIODS AVERAGE RETURN
24
Source: Group estimates.

** The results are obtained in non friction cost scenario.
Below are the illustration of optimized RSI indicator for 2012, January 2011 June 2011
and April 2011 June 2011.
RSI 8 - 2012
2012 (3,173.03, 3,176.18, 3,160.80, 3,167.08, -24.7200), Relative Strength Index (59.3817)
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
1.5
1.0
0.5
0.0
-0.5
-1.0
2012
February
March
April
May
June
July
Augus t
Septem ber
October
Novem ber
Decem ber
2013
RSI 14 Jan2011 Jun 2011

APRJUN2011 (3,084.86, 3,127.48, 3,083.80, 3,120.44, +40.7000), Relative Strength Index (57.2992)
65
60
55
50
45
40
35
30
1.5
1.0
0.5
0.0
-0.5
-1.0
1
2011
11
18
25
3
May
16
23
30
13
20
27
4
July
June
11
RSI 15 Apr 2011 Jun 2011

JANJUN2011 (3,084.86, 3,127.48, 3,083.80, 3,120.44, +40.7000), Relative Strength Index (58.1833)
3300
3250
3200
3150
3100
3050
3000
2950
2900
1.5
1.0
0.5
0.0
-0.5
-1.0
3
10
2011
17
24
31
7
14
February
21
28
7
March
14
21
28
4
April
Source: MetaStock
11
18
25
3
9
May
16
23
30
6
June
13
20
27
4
July
11
2. Income without friction cost

We divide the total time frame into 56 3 month sub periods, 28 6 month sub periods
and 14 12 month sub periods. After that we calculated the income generated of each
individual sub period. The graphs below show what we obtained from the test
% Gain 3 - month sub - period

4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
5 7
9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55
-2.00%
-3.00%
-4.00%
% Gain 6 - month sub - periods

6.00%
4.00%
2.00%
0.00%
1
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
-2.00%
-4.00%
-6.00%
% Gain 12 - month sub - periods

10.00%
5.00%
0.00%
1
-5.00%
-10.00%
-15.00%
10
10
11
12
13
14

Generally, the average incomes of all windows are positive. Although we suffer from some
severe losses, the overall result is a positive return.
3. Income with friction cost
It should be firstly noted that we have different input period for RSI in this scenario.
According to our calculation, the best configuration for 3- month, 6 month and 12
month periods are 24, 18 and 24 days respectively.
Interestingly, when we incorporate the friction cost of 2% of each trade, we witness
negative incomes for all windows. It is obvious that we still can make profits in some
particular sub periods, however the total returns for all sub periods are negative.
The graph below shows the results of our calculation.
3 - month sub - periods

2.00%
1.00%
0.00%
-1.00%
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55
-2.00%
-3.00%
-4.00%

The pattern seems like we still make profits most of the time, even when we incorporate
the commissions on each trade. However, when we pay attention to the number of trades
during all the 3 month sub periods, we notice the number of trades of 42/56 observations
are equal to 0, which means the positive incomes generated simply by buying and holding
the stock rather than actively trading. All the returns generated when the trade number is 0
are around 0.14%. Appendix 3, Table 3.1 provides a closer look at the details.
Besides that, we suffer from losses 12/14 times when trading number is larger than 0
(merely 1 for 3 month sub periods). The highest loss is 2.83% and the highest profits
is 1.55%. The average return for all 56 3 month periods is -0.07%.
11

5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
-2.00%
-3.00%
-4.00%
-5.00%

5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
-5.00%
-6.00%
10
11
12
13
14

Although the returns swing more wildly in the latter sub periods of 6 months and 12
months, the total return is still negative. The losses are 0.06% and 0.61% for 6 month
window and 12 month window respectively.
In general, we can conclude that in the scenario of 0 friction cost or friction cost is trivial,
we can probably make profits by actively trading using the RSI indicator. However, the
situation completely turns upside down when we incorporate the friction cost of 2% of each
trade and obviously the loss will increase alongside with the friction cost.
12
Part III: Statistical effect

In this section, our studies will focus on answering two questions:
-
Is RSI a stable and reliable indicator?
Is the income from active trading strategy following RSI significantly larger than
income from passive trading strategy (buy and hold)?
We use the figure from no friction cost scenario since obviously, if the returns from this
scenario are not statistically significant then the returns from the other scenario will surely
be the same.
1. Income volatility and risk
Here we will find the Value at Risk (VaR) and Standard Deviation of the returns
generated by the RSI for 3 month, 6 month and 12 - month periods. VaR is the largest
possible loss of an asset or a portfolio in the future, given a certain probability (Jorion
2007). Standard deviation (volatility) tests the dispersion of the returns from their mean
(Jorion 1995). Moreover, this paper uses two methods to calculate the VaR parametric
and non parametric method (historical simulation). Historical simulation is a method that
uses past return data to predict future returns (Linsmeier & Pearson 1996). Besides, it is
important to test whether the average returns generated by the RSI are significantly
different from zero. Since we just test a sample of total returns generated by the RSI, we
use Students t test which is quite satisfied for testing when the sample size is small and
the standard deviation of the population is unknown (Pfanzagl 1996).
The calculation of the Z value,
=
The calculation for volatility,

2 =
=1( )
= Volatility
13
The statistical results are given below

VaR (HS)
VaR (Norm Dist)
Volatility
3 month
-2.56%
-1.763
1.1788%
6 month
-3.65%
-3.29
2.2897%
-11.53% (10%)
-7.108
4.7763%
12 month

According to the statistical results, for the historical simulation method, with 95%
confidence, we say that for the 3 month periods, the returns generated by the RSI will not
be less than negative 2.56%. Similarly, with 95% confidence, we say that for the 6 month
periods, the returns generated by the RSI will not be less than negative 3.65%. Because of
the limitation of the sample size of the one year data, we test the 10% VaR for the 12
month periods and witness that for that window, with 90% confidence, we would not suffer
from a loss larger than 11.53%. For the parametric method, we can similarly conclude that
with 95% confidence we say that the returns generated by the RSI will not be less than
negative 1.763%, 3.29% and 7.18% for 3 month, 6 month and 1 year periods
respectively. The results though are not perfectly the same due to technical differences
between two methods, still provide us similar patterns. The volatilities of the returns are
0.11788, 0.22897 and 0.47763 for 3 month, 6 month and 1 year periods respectively.
Expected Shortfall is simply the average of all the worst returns at a particular significance
level. The "expected shortfall at q% level" means that the expected return from the portfolio
in the worst q% of the data. Through ranking and computing the %gain of our data, we
obtain the ES from the portfolio.
3 month period
6 month period
1 year period
90% confidence
-2.93%
-3.41%
-5.94%
95% confidence
-3.12%
-3.53%
-7.87%
14
The table above shows the results for different periods at 90% and 95% significance level.
We obtain the corresponding results for 3 month sub - periods which are -2.93% and 3.12% respectively whereas the figures of 12 month sub periods are -5.94% and -7.87%.
It can be interpreted that returns are negatively correlated with investment time frame. The
wider the time frame, the higher loss you probably will experience.
Significance of the returns generated by the RSI.
0 : mean return is zero.
1 : mean return is significantly different from zero.
We use Students t test to test the significance since the standard deviation of the
population is unknown.
The calculation of t value:

(
< ) 1 ()

: The mean of returns.
: The number of sub samples (i.e. the number of observations)
: The standard error of returns.
: The given probability.
The result is as below:

3 month
6 month
12 month
t-value
1.14
1.11
0.56
Mean return
0.18%
0.48%
0.75%
Critical value
2.004
2.052
2.160
Result
Insignificant
Insignificant
Insignificant

We failed to reject the null hypothesis of insignificance in all 3 month, 6 month and 12
month sub period. Generally, we can conclude that average returns of our investment
following RSI indicator are not significantly different from 0.
15
Overall, it is shown that although the mean returns on our investments seem like positive
ones, but in fact they are not significantly different from zero, which means from the
perspective of statistics, the RSI cannot make consistently positive profits over a long
period. Moreover, it is not suitable for long term traders since they will suffer from higher
loss as well as wilder swing in returns as trading time frame gets wider. Nonetheless, it
should be noted that the strategy following RSI indicator is not that useless. It is still
profitable for some particular sub periods, yet it is not a fully reliable one that can bring
positive income most of the time.
2. Can we beat the market?
Beating the market means trying to earn an investment return greater than that of the
FSTTI index. In order to know whether we can beat the market, we test the difference
between two population means: one is the average return from active trading strategy
following RSI, the other is the average return from passive trading strategy. Before
proceeding to the test, we have made three assumptions (David 2014):
- The two populations have the same variance.
- The populations are normally distributed.
- Each value is sampled independently from each other value.
The formula for test statistic computation is given:
=
0 : the difference between two means is not significantly larger than 0 (statistic = 0).
1 : the difference between two means is significantly larger than 0 (statistic > 0).
Firstly we calculate the difference of sample mean: 1 2 .
Then we compute the estimate of the standard error of the statistic as below:
12 =
(MSE is the estimation of population variance, =
With degree of freedom as 2n 2, the results computed are as below:
16
12 + 22
2
Duration
t-stat
P-Value (one tail)
Result
3-month
-0.150886368
0.440170853
insignificant
6-month
1.914985144
0.030398749
significant
1-year
-0.467494706
0.322020314
insignificant

We can see from the table that the income from active trading strategy following RSI is
significantly larger than the income from passive trading strategy only in 6 month
periods. Therefore, we have the evidence to support the point that we cannot obtain exceed
earnings from active trading strategy following RSI. In other words, we simply cannot beat
the market.
Part IV: Conclusion and recommendation
Though this rule performs well during certain times, it does not show a significant
consistency as an efficiently profitable trading rule over long periods. The returns we
obtain are trivial and cannot cover the friction cost (2%). Generally, we failed to use this
trading rule to beat the market. This conclusion is consistent with the fore mentioned
theory of the weak form of market efficiency.
From our humble test, yet we cannot confirm the existence of the weak form of market
efficiency, we still obtain more evidences of that existence. Also the test results have
created a wide open of further researching and studies about using combined trading rules
as well as hedging techniques to reduce the loss, thus increase the chance of outperforming
the market.
17
Appendix 1: Singapore Interest Rates and Interest Margin

End of Period
2000
2001
2002
2003
Lending Rate
3 Months
Margin
6 Months
Margin
12 Months
Margin
Jan
5.8
1.68
4.12
2.04
3.76
2.46
3.34
Feb
5.85
1.72
4.13
2.07
3.78
2.46
3.39
Mar
5.85
1.72
4.13
2.07
3.78
2.46
3.39
Apr
5.85
1.72
4.13
2.07
3.78
2.46
3.39
May
5.85
1.72
4.13
2.07
3.78
2.46
3.39
Jun
5.85
1.72
4.13
2.07
3.78
2.46
3.39
Jul
5.85
1.72
4.13
2.07
3.78
2.46
3.39
Aug
5.85
1.72
4.13
2.07
3.78
2.46
3.39
Sep
5.85
1.72
4.13
2.07
3.78
2.46
3.39
Oct
5.8
1.7
4.1
2.04
3.76
2.42
3.38
Nov
5.8
1.7
4.1
2.04
3.76
2.42
3.38
Dec
5.8
1.7
4.1
2.04
3.76
2.42
3.38
Jan
5.8
1.7
4.1
2.04
3.76
2.42
3.38
Feb
5.8
1.7
4.1
2.04
3.76
2.37
3.43
Mar
5.8
1.7
4.1
2.04
3.76
2.37
3.43
Apr
5.8
1.7
4.1
2.04
3.76
2.37
3.43
May
5.8
1.7
4.1
2.04
3.76
2.37
3.43
Jun
5.8
1.7
4.1
2.04
3.76
2.36
3.44
Jul
5.8
1.7
4.1
2.04
3.76
2.36
3.44
Aug
5.8
1.7
4.1
2.04
3.76
2.33
3.47
Sep
5.48
1.36
4.12
1.69
3.79
1.93
3.55
Oct
5.3
1.15
4.15
1.45
3.85
1.67
3.63
Nov
5.3
1.11
4.19
1.43
3.87
1.61
3.69
Dec
5.3
1.02
4.28
1.33
3.97
1.53
3.77
Jan
5.3
4.3
1.29
4.01
1.51
3.79
Feb
5.35
0.98
4.37
1.25
4.1
1.46
3.89
Mar
5.35
0.95
4.4
1.23
4.12
1.44
3.91
Apr
5.35
0.95
4.4
1.23
4.12
1.44
3.91
May
5.35
0.91
4.44
1.18
4.17
1.38
3.97
Jun
5.35
0.91
4.44
1.18
4.17
1.4
3.95
Jul
5.35
0.83
4.52
1.11
4.24
1.38
3.97
Aug
5.35
0.78
4.57
1.06
4.29
1.33
4.02
Sep
5.35
0.78
4.57
1.05
4.3
1.33
4.02
Oct
5.35
0.78
4.57
1.05
4.3
1.33
4.02
Nov
5.35
0.78
4.57
1.05
4.3
1.32
4.03
Dec
5.35
0.78
4.57
1.05
4.3
1.32
4.03
Jan
5.35
0.78
4.57
1.05
4.3
1.3
4.05
Feb
5.33
0.73
4.6
1.01
4.32
1.25
4.08
18
2004
2005
2006
Mar
5.3
0.62
4.68
0.88
4.42
1.15
4.15
Apr
5.3
0.62
4.68
0.88
4.42
1.15
4.15
May
5.3
0.44
4.86
0.56
4.74
0.74
4.56
Jun
5.3
0.42
4.88
0.53
4.77
0.72
4.58
Jul
5.3
0.42
4.88
0.53
4.77
0.7
4.6
Aug
5.3
0.4
4.9
0.52
4.78
0.7
4.6
Sep
5.3
0.4
4.9
0.52
4.78
0.7
4.6
Oct
5.3
0.4
4.9
0.52
4.78
0.7
4.6
Nov
5.3
0.4
4.9
0.52
4.78
0.7
4.6
Dec
5.3
0.4
4.9
0.52
4.78
0.7
4.6
Jan
5.3
0.4
4.9
0.52
4.78
0.7
4.6
Feb
5.3
0.4
4.9
0.51
4.79
0.7
4.6
Mar
5.3
0.4
4.9
0.51
4.79
0.7
4.6
Apr
5.3
0.4
4.9
0.51
4.79
0.7
4.6
May
5.3
0.4
4.9
0.51
4.79
0.7
4.6
Jun
5.3
0.4
4.9
0.51
4.79
0.7
4.6
Jul
5.3
0.4
4.9
0.51
4.79
0.7
4.6
Aug
5.3
0.4
4.9
0.51
4.79
0.71
4.59
Sep
5.3
0.41
4.89
0.52
4.78
0.72
4.58
Oct
5.3
0.41
4.89
0.52
4.78
0.72
4.58
Nov
5.3
0.41
4.89
0.52
4.78
0.72
4.58
Dec
5.3
0.41
4.89
0.52
4.78
0.72
4.58
Jan
5.3
0.41
4.89
0.52
4.78
0.72
4.58
Feb
5.3
0.41
4.89
0.52
4.78
0.72
4.58
Mar
5.3
0.41
4.89
0.52
4.78
0.72
4.58
Apr
5.3
0.42
4.88
0.53
4.77
0.74
4.56
May
5.3
0.42
4.88
0.53
4.77
0.74
4.56
Jun
5.3
0.42
4.88
0.53
4.77
0.74
4.56
Jul
5.3
0.42
4.88
0.53
4.77
0.74
4.56
Aug
5.3
0.42
4.88
0.53
4.77
0.74
4.56
Sep
5.3
0.42
4.88
0.53
4.77
0.74
4.56
Oct
5.3
0.45
4.85
0.57
4.73
0.78
4.52
Nov
5.3
0.53
4.77
0.62
4.68
0.83
4.47
Dec
5.3
0.56
4.74
0.66
4.64
0.86
4.44
Jan
5.3
0.56
4.74
0.66
4.64
0.86
4.44
Feb
5.3
0.57
4.73
0.66
4.64
0.87
4.43
Mar
5.3
0.57
4.73
0.67
4.63
0.88
4.42
Apr
5.3
0.57
4.73
0.67
4.63
0.89
4.41
May
5.3
0.57
4.73
0.68
4.62
0.89
4.41
Jun
5.3
0.57
4.73
0.68
4.62
0.89
4.41
Jul
5.3
0.57
4.73
0.69
4.61
0.89
4.41
19
2007
2008
2009
Aug
5.33
0.58
4.75
0.69
4.64
0.89
4.44
Sep
5.33
0.57
4.76
0.68
4.65
0.89
4.44
Oct
5.33
0.57
4.76
0.67
4.66
0.87
4.46
Nov
5.33
0.57
4.76
0.67
4.66
0.88
4.45
Dec
5.33
0.57
4.76
0.67
4.66
0.88
4.45
Jan
5.33
0.57
4.76
0.67
4.66
0.87
4.46
Feb
5.33
0.57
4.76
0.67
4.66
0.87
4.46
Mar
5.33
0.56
4.77
0.67
4.66
0.87
4.46
Apr
5.33
0.53
4.8
0.64
4.69
0.85
4.48
May
5.33
0.52
4.81
0.62
4.71
0.83
4.5
Jun
5.33
0.51
4.82
0.62
4.71
0.83
4.5
Jul
5.33
0.51
4.82
0.62
4.71
0.84
4.49
Aug
5.33
0.52
4.81
0.63
4.7
0.84
4.49
Sep
5.33
0.53
4.8
0.64
4.69
0.85
4.48
Oct
5.33
0.51
4.82
0.62
4.71
0.84
4.49
Nov
5.33
0.51
4.82
0.62
4.71
0.83
4.5
Dec
5.33
0.51
4.82
0.62
4.71
0.83
4.5
Jan
5.38
0.48
4.9
0.59
4.79
0.79
4.59
Feb
5.38
0.46
4.92
0.55
4.83
0.74
4.64
Mar
5.38
0.42
4.96
0.52
4.86
0.71
4.67
Apr
5.38
0.41
4.97
0.51
4.87
0.71
4.67
May
5.38
0.42
4.96
0.52
4.86
0.71
4.67
Jun
5.38
0.41
4.97
0.53
4.85
0.73
4.65
Jul
5.38
0.4
4.98
0.54
4.84
0.74
4.64
Aug
5.38
0.39
4.99
0.53
4.85
0.73
4.65
Sep
5.38
0.41
4.97
0.53
4.85
0.73
4.65
Oct
5.38
0.43
4.95
0.55
4.83
0.73
4.65
Nov
5.38
0.41
4.97
0.55
4.83
0.73
4.65
Dec
5.38
0.39
4.99
0.51
4.87
0.7
4.68
Jan
5.38
0.38
0.49
4.89
0.69
4.69
Feb
5.38
0.37
5.01
0.46
4.92
0.64
4.74
Mar
5.38
0.32
5.06
0.37
5.01
0.58
4.8
Apr
5.38
0.32
5.06
0.36
5.02
0.57
4.81
May
5.38
0.32
5.06
0.36
5.02
0.57
4.81
Jun
5.38
0.27
5.11
0.34
5.04
0.54
4.84
Jul
5.38
0.26
5.12
0.34
5.04
0.53
4.85
Aug
5.38
0.26
5.12
0.34
5.04
0.53
4.85
Sep
5.38
0.26
5.12
0.34
5.04
0.53
4.85
Oct
5.38
0.25
5.13
0.34
5.04
0.53
4.85
Nov
5.38
0.25
5.13
0.34
5.04
0.53
4.85
Dec
5.38
0.25
5.13
0.34
5.04
0.53
4.85
20
2010
2011
2012
2013
Jan
5.38
0.22
5.16
0.31
5.07
0.51
4.87
Feb
5.38
0.22
5.16
0.31
5.07
0.51
4.87
Mar
5.38
0.22
5.16
0.31
5.07
0.51
4.87
Apr
5.38
0.22
5.16
0.31
5.07
0.51
4.87
May
5.38
0.21
5.17
0.3
5.08
0.49
4.89
Jun
5.38
0.21
5.17
0.3
5.08
0.48
4.9
Jul
5.38
0.2
5.18
0.29
5.09
0.47
4.91
Aug
5.38
0.2
5.18
0.29
5.09
0.47
4.91
Sep
5.38
0.2
5.18
0.29
5.09
0.47
4.91
Oct
5.38
0.19
5.19
0.28
5.1
0.45
4.93
Nov
5.38
0.19
5.19
0.28
5.1
0.45
4.93
Dec
5.38
0.19
5.19
0.28
5.1
0.45
4.93
Jan
5.38
0.18
5.2
0.26
5.12
0.43
4.95
Feb
5.38
0.18
5.2
0.26
5.12
0.43
4.95
Mar
5.38
0.18
5.2
0.26
5.12
0.43
4.95
Apr
5.38
0.18
5.2
0.26
5.12
0.43
4.95
May
5.38
0.18
5.2
0.26
5.12
0.43
4.95
Jun
5.38
0.18
5.2
0.26
5.12
0.43
4.95
Jul
5.38
0.18
5.2
0.26
5.12
0.43
4.95
Aug
5.38
0.17
5.21
0.24
5.14
0.39
4.99
Sep
5.38
0.16
5.22
0.23
5.15
0.38
Oct
5.38
0.15
5.23
0.21
5.17
0.34
5.04
Nov
5.38
0.14
5.24
0.19
5.19
0.32
5.06
Dec
5.38
0.14
5.24
0.19
5.19
0.32
5.06
Jan
5.38
0.13
5.25
0.19
5.19
0.29
5.09
Feb
5.38
0.13
5.25
0.19
5.19
0.29
5.09
Mar
5.38
0.13
5.25
0.19
5.19
0.29
5.09
Apr
5.38
0.13
5.25
0.19
5.19
0.29
5.09
May
5.38
0.13
5.25
0.19
5.19
0.29
5.09
Jun
5.38
0.14
5.24
0.19
5.19
0.3
5.08
Jul
5.38
0.14
5.24
0.19
5.19
0.3
5.08
Aug
5.38
0.14
5.24
0.2
5.18
0.32
5.06
Sep
5.38
0.14
5.24
0.2
5.18
0.32
5.06
Oct
5.38
0.14
5.24
0.2
5.18
0.32
5.06
Nov
5.38
0.14
5.24
0.2
5.18
0.32
5.06
Dec
5.38
0.14
5.24
0.2
5.18
0.32
5.06
Jan
5.38
0.14
5.24
0.2
5.18
0.32
5.06
Feb
5.38
0.14
5.24
0.2
5.18
0.32
5.06
Mar
5.38
0.14
5.24
0.2
5.18
0.32
5.06
Apr
5.38
0.14
5.24
0.2
5.18
0.32
5.06
May
5.38
0.14
5.24
0.2
5.18
0.32
5.06
21
Jun
5.38
0.14
5.24
0.2
5.18
0.32
5.06
Jul
5.38
0.14
5.24
0.2
5.18
0.32
5.06
Aug
5.38
0.14
5.24
0.2
5.18
0.32
5.06
Sep
5.38
0.14
5.24
0.2
5.18
0.32
5.06
Oct
5.38
0.14
5.24
0.2
5.18
0.32
5.06
Nov
5.38
0.14
5.24
0.2
5.18
0.32
5.06
Dec
5.38
0.14
5.24
0.2
5.18
0.32
5.06
0.56
4.84
0.71
4.69
0.92
4.49
Average
Table 1.1
22
Appendix 2 Income without friction cost

3 month sub periods income generated, RSI (15)
ID Date Range
Net Profits
% Gain
Trades
1/3/2000 - 3/31/2000
$13.51
0.14%
4/3/2000 - 6/30/2000
$262.80
2.63%
7/3/2000 - 9/29/2000
$237.83
2.38%
10/2/2000 - 12/29/2000
$13.51
0.14%
1/2/2001 - 3/30/2001
$13.36
0.13%
4/2/2001 - 6/29/2001
$13.51
0.14%
7/2/2001 - 9/28/2001
($281.14)
-2.81%
10/1/2001 - 12/31/2001
($342.50)
-3.42%
1/2/2002 - 3/28/2002
($21.05)
-0.21%
10
4/1/2002 - 6/28/2002
($90.51)
-0.91%
11
7/1/2002 - 9/30/2002
($91.68)
-0.92%
12
10/1/2002 - 12/31/2002
$272.45
2.72%
13
1/2/2003 - 3/31/2003
$52.94
0.53%
14
4/1/2003 - 6/30/2003
$65.62
0.66%
15
7/1/2003 - 9/30/2003
($119.20)
-1.19%
16
10/1/2003 - 12/31/2003
($56.27)
-0.56%
17
4/1/2004 - 6/30/2004
$80.02
0.80%
18
1/2/2004 - 3/31/2004
($1.03)
-0.01%
19
7/1/2004 - 9/30/2004
$52.68
0.53%
20
10/1/2004 - 12/31/2004
$13.97
0.14%
21
1/3/2005 - 3/31/2005
$37.51
0.38%
22
4/1/2005 - 6/30/2005
$13.82
0.14%
23
7/1/2005 - 9/30/2005
$78.15
0.78%
24
10/3/2005 - 12/30/2005
$13.51
0.14%
25
1/3/2006 - 3/31/2006
($13.79)
-0.14%
26
4/3/2006 - 6/30/2006
$319.83
3.20%
Table
27
7/3/2006 - 9/29/2006
$13.51
0.14%
2.1
28
10/2/2006 - 12/29/2006
($256.37)
-2.56%
23
29
1/3/2007 - 3/30/2007
$20.96
0.21%
30
4/2/2007 - 6/29/2007
$13.51
0.14%
31
7/2/2007 - 9/28/2007
$13.51
0.14%
32
10/1/2007 - 12/31/2007
$13.97
0.14%
33
1/2/2008 - 3/31/2008
$13.66
0.14%
34
4/1/2008 - 6/30/2008
$13.82
0.14%
35
7/1/2008 - 9/30/2008
$13.97
0.14%
36
10/2/2008 - 12/31/2008
($0.54)
-0.01%
37
1/2/2009 - 3/31/2009
$161.79
1.62%
38
4/1/2009 - 6/30/2009
($156.10)
-1.56%
39
7/1/2009 - 9/30/2009
($42.62)
-0.43%
40
10/1/2009 - 12/31/2009
$13.97
0.14%
41
1/4/2010 - 3/31/2010
$13.20
0.13%
42
4/1/2010 - 6/30/2010
$13.82
0.14%
43
7/1/2010 - 9/30/2010
($83.42)
-0.83%
44
10/1/2010 - 12/31/2010
$116.57
1.17%
45
1/3/2011 - 3/31/2011
$13.36
0.13%
46
4/1/2011 - 6/30/2011
$13.82
0.14%
47
7/1/2011 - 9/30/2011
$13.97
0.14%
48
10/3/2011 - 12/30/2011
$202.10
2.02%
49
1/3/2012 - 3/30/2012
$9.09
0.09%
50
4/2/2012 - 6/29/2012
$13.51
0.14%
51
7/2/2012 - 9/28/2012
$26.83
0.27%
52
10/1/2012 - 12/31/2012
$13.97
0.14%
53
1/2/2013 - 3/28/2013
$13.05
0.13%
54
4/1/2013 - 6/28/2013
$199.05
1.99%
55
7/1/2013 - 9/30/2013
$13.97
0.14%
56
10/1/2013 - 12/31/2013
$13.97
0.14%
month sub periods income generated, RSI (14)
ID Date Range
Net Profits
% Gain
Trades
1/3/2000 - 6/30/2000
$283.93
2.84%
1/2/2001 - 6/29/2001
$14.80
0.15%
24
1/2/2002 - 6/28/2002
$253.17
2.53%
1/2/2003 - 6/30/2003
$135.55
1.36%
1/2/2004 - 6/30/2004
$268.49
2.68%
1/3/2005 - 6/30/2005
($41.84)
-0.42%
1/3/2006 - 6/30/2006
$92.96
0.93%
1/3/2007 - 6/29/2007
($288.49)
-2.88%
1/2/2008 - 6/30/2008
$35.07
0.35%
10
1/2/2009 - 6/30/2009
$474.40
4.74%
11
1/4/2010 - 6/30/2010
$268.46
2.68%
12
1/3/2011 - 6/30/2011
$34.68
0.35%
13
1/3/2012 - 6/29/2012
$176.47
1.76%
14
1/2/2013 - 6/28/2013
$127.94
1.28%
15
7/3/2000 - 12/29/2000
$259.93
2.60%
16
7/2/2001 - 12/31/2001
($109.90)
-1.10%
17
7/1/2002 - 12/31/2002
($89.54)
-0.90%
18
7/1/2003 - 12/31/2003
($339.93)
-3.40%
19
6/1/2004 - 12/31/2004
($95.34)
-0.95%
20
7/1/2005 - 12/30/2005
$164.98
1.65%
21
7/3/2006 - 12/29/2006
($319.48)
-3.19%
22
7/2/2007 - 12/31/2007
$430.31
4.30%
23
7/1/2008 - 12/31/2008
($365.40)
-3.65%
24
7/1/2009 - 12/31/2009
($240.71)
-2.41%
25
7/1/2010 - 12/31/2010
($148.14)
-1.48%
26
7/1/2011 - 12/30/2011
$35.46
0.35%
27
7/2/2012 - 12/31/2012
$74.81
0.75%
28
7/1/2013 - 12/31/2013
$239.64
2.40%
Table 2.2
ID Date Range
Net Profits
% Gain
Trades
1/4/2000 - 12/29/2000
$477.53
4.78%
1/2/2001 - 12/31/2001
$293.52
2.94%
25
1/3/2002 - 12/31/2002
$364.62
3.65%
1/6/2003 - 12/31/2003
$443.83
4.44%
1/7/2004 - 12/31/2004
$47.77
0.48%
1/3/2005 - 12/30/2005
$23.90
0.24%
1/3/2006 - 12/29/2006
($445.32)
-4.45%
1/3/2007 - 12/31/2007
$2.85
0.03%
1/7/2008 - 12/31/2008
($230.40)
-2.30%
10
1/6/2009 - 12/31/2009
($1,175.87)
-11.76%
11
1/6/2010 - 12/31/2010
($209.58)
-2.10%
12
1/4/2011 - 12/30/2011
$664.22
6.64%
13
1/4/2012 - 12/31/2012
($25.66)
-0.26%
14
1/3/2013 - 12/31/2013
$484.91
4.85%
Table 2.3
26
Appendix 3: Income with friction cost of 2%

ID Date Range
Net Profits
% Gain
Trades
1/3/2000 - 3/31/2000
$13.51
0.14%
4/3/2000 - 6/30/2000
$13.51
0.14%
7/3/2000 - 9/29/2000
$13.51
0.14%
10/2/2000 - 12/29/2000
$13.51
0.14%
1/2/2001 - 3/30/2001
($85.10)
-0.85%
4/2/2001 - 6/29/2001
$13.51
0.14%
7/2/2001 - 9/28/2001
($12.77)
-0.13%
10/1/2001 - 12/31/2001
($100.49)
-1.00%
1/2/2002 - 3/28/2002
$13.05
0.13%
10
4/1/2002 - 6/28/2002
($126.46)
-1.26%
11
7/1/2002 - 9/30/2002
$13.97
0.14%
12
10/1/2002 - 12/31/2002
$13.97
0.14%
13
1/2/2003 - 3/31/2003
$13.51
0.14%
14
4/1/2003 - 6/30/2003
($37.50)
-0.37%
15
7/1/2003 - 9/30/2003
($282.79)
-2.83%
16
10/1/2003 - 12/31/2003
$13.97
0.14%
17
1/2/2004 - 3/31/2004
$13.66
0.14%
18
4/1/2004 - 6/30/2004
$13.82
0.14%
19
7/1/2004 - 9/30/2004
($24.44)
-0.24%
20
10/1/2004 - 12/31/2004
$13.97
0.14%
21
1/3/2005 - 3/31/2005
$13.36
0.13%
22
4/1/2005 - 6/30/2005
$13.82
0.14%
23
7/1/2005 - 9/30/2005
($11.31)
-0.11%
24
10/3/2005 - 12/30/2005
$13.51
0.14%
25
1/3/2006 - 3/31/2006
$13.36
0.13%
26
4/3/2006 - 6/30/2006
$144.59
1.45%
27
7/3/2006 - 9/29/2006
$13.51
0.14%
28
10/2/2006 - 12/29/2006
$13.51
0.14%
27
29
1/3/2007 - 3/30/2007
$13.20
0.13%
30
4/2/2007 - 6/29/2007
$13.51
0.14%
31
7/2/2007 - 9/28/2007
$13.51
0.14%
32
10/1/2007 - 12/31/2007
$13.97
0.14%
33
1/2/2008 - 3/31/2008
$13.66
0.14%
34
4/1/2008 - 6/30/2008
$13.82
0.14%
35
7/1/2008 - 9/30/2008
$13.97
0.14%
36
10/2/2008 - 12/31/2008
$13.82
0.14%
37
1/2/2009 - 3/31/2009
$155.27
1.55%
38
4/1/2009 - 6/30/2009
($199.36)
-1.99%
39
7/1/2009 - 9/30/2009
($94.94)
-0.95%
40
10/1/2009 - 12/31/2009
$13.97
0.14%
41
1/4/2010 - 3/31/2010
$13.20
0.13%
42
4/1/2010 - 6/30/2010
$13.82
0.14%
43
7/1/2010 - 9/30/2010
($209.40)
-2.09%
44
10/1/2010 - 12/31/2010
$13.97
0.14%
45
1/3/2011 - 3/31/2011
$13.36
0.13%
46
4/1/2011 - 6/30/2011
$13.82
0.14%
47
7/1/2011 - 9/30/2011
$13.97
0.14%
48
10/3/2011 - 12/30/2011
$13.51
0.14%
49
1/3/2012 - 3/30/2012
($78.24)
-0.78%
50
4/2/2012 - 6/29/2012
$13.51
0.14%
51
7/2/2012 - 9/28/2012
$13.51
0.14%
52
10/1/2012 - 12/31/2012
$13.97
0.14%
53
1/2/2013 - 3/28/2013
$13.05
0.13%
54
4/1/2013 - 6/28/2013
$13.51
0.14%
55
7/1/2013 - 9/30/2013
$13.97
0.14%
56
10/1/2013 - 12/31/2013
$13.97
0.14%
Table 3.1
28

ID Date Range
Net Profits
% Gain
Trades
1/3/2000 - 6/30/2000
$247.13
2.47%
7/3/2000 - 12/29/2000
$34.88
0.35%
1/2/2001 - 6/29/2001
$2.50
0.03%
7/2/2001 - 12/31/2001
($145.42)
-1.45%
1/2/2002 - 6/28/2002
$9.21
0.09%
7/1/2002 - 12/31/2002
($33.68)
-0.34%
1/2/2003 - 6/30/2003
$227.85
2.28%
7/1/2003 - 12/31/2003
($401.63)
-4.02%
1/2/2004 - 6/30/2004
$66.57
0.67%
10
6/1/2004 - 12/31/2004
($172.60)
-1.73%
11
1/3/2005 - 6/30/2005
($89.14)
-0.89%
12
7/1/2005 - 12/30/2005
$4.30
0.04%
13
1/3/2006 - 6/30/2006
$30.68
0.31%
14
7/3/2006 - 12/29/2006
($334.15)
-3.34%
15
1/3/2007 - 6/29/2007
$34.49
0.34%
16
7/2/2007 - 12/31/2007
$330.33
3.30%
17
1/2/2008 - 6/30/2008
$35.07
0.35%
18
7/1/2008 - 12/31/2008
($217.22)
-2.17%
19
1/2/2009 - 6/30/2009
$386.94
3.87%
20
7/1/2009 - 12/31/2009
($293.13)
-2.93%
21
1/4/2010 - 6/30/2010
$34.49
0.34%
22
7/1/2010 - 12/31/2010
($236.18)
-2.36%
23
1/3/2011 - 6/30/2011
$34.68
0.35%
24
7/1/2011 - 12/30/2011
$35.46
0.35%
25
1/3/2012 - 6/29/2012
$103.62
1.04%
26
7/2/2012 - 12/31/2012
($34.23)
-0.34%
27
1/2/2013 - 6/28/2013
$137.36
1.37%
28
7/1/2013 - 12/31/2013
$35.66
0.36%
Table 3.2
29

ID Date Range
Net Profits
% Gain
Trades
1/4/2000 - 12/29/2000
$182.24
1.82%
1/2/2001 - 12/31/2001
($155.95)
-1.56%
1/3/2002 - 12/31/2002
($295.93)
-2.96%
1/6/2003 - 12/31/2003
($512.23)
-5.12%
1/7/2004 - 12/31/2004
$115.47
1.15%
1/3/2005 - 12/30/2005
($140.90)
-1.41%
1/3/2006 - 12/29/2006
($420.53)
-4.21%
1/3/2007 - 12/31/2007
$388.28
3.88%
1/7/2008 - 12/31/2008
($162.81)
-1.63%
10
1/6/2009 - 12/31/2009
($322.62)
-3.23%
11
1/6/2010 - 12/31/2010
$8.41
0.08%
12
1/4/2011 - 12/30/2011
$91.15
0.91%
13
1/4/2012 - 12/31/2012
$120.14
1.20%
14
1/3/2013 - 12/31/2013
$249.80
2.50%
Table 3.3
30
References
Anon, MAS. Available at: http://www.mas.gov.sg/ [Accessed November 27, 2014].
Bulkowski, 2008. Bulkowskis RSI. Available at: http://thepatternsite.com/RSI.html
[Accessed November 27, 2014].
David, M.L., 2014. Testing Differences Between Means. Available at:
http://onlinestatbook.com/2/tests_of_means/difference_means.html [Accessed November
27, 2014].
Jorion, P., 1995. Predicting Volatility in the Foreign Exchange Market. The Journal of
Finance, 50, pp.507528. Available at: http://www.jstor.org/stable/2329417.
Jorion, P., 2007. Value at Risk: The New Benchmark for Managing Financial Risk,
Available at: http://www.lavoisier.fr/livre/notice.asp?id=OOLWR2AAAO3OWX.
Linsmeier, T.J. & Pearson, N.D., 1996. Risk Measurement: An Introduction to Value at
Risk. Working Paper, 6153, pp.145. Available at:
http://www.casact.net/education/specsem/99frmgt/pearson2.pdf.
Pfanzagl, J., 1996. Studies in the history of probability and statistics XLIV. A forerunner
of the t-distribution. Biometrika, 83(4), pp.891898.
31

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Backtesting RSI Trading Rules

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UCD Michael Smurfit Business School

CAPITAL MARKETS AND INTRUMENTS (CMI) FIN41350

Part I: Introduction and background

RS = Average Gain / Average Loss

First Average Loss = Sum of Losses over the past 14 periods / 14

Average Gain = [(previous Average Gain) x 13 + current Gain] / 14

Average Loss = [(previous Average Loss) x 13 + current Loss] / 14.

Source: Group estimates

3 month sub period

6 month sub period

12 month sub period

Source: Group estimates

Initial balance and risk averse

Part II: Economic effect

Buy order/Buy to cover order : Cross( RSI(opt1), 30 )

Sell order/Sell short

: Cross( 70, RSI(opt1))

Opt1 is the optimized number of periods (days) used in RSI computation.

12 - MONTH SUB - PERIOD AVERAGE RETURN

6 - MONTH SUB - PERIOD AVERAGE RETURN

3 - MONTH SUB - PERIODS AVERAGE RETURN

Source: Group estimates.

RSI 14 Jan2011 Jun 2011

RSI 15 Apr 2011 Jun 2011

2. Income without friction cost

% Gain 3 - month sub - period

% Gain 6 - month sub - periods

% Gain 12 - month sub - periods

Source: Group estimates

3 - month sub - periods

Source: Group estimates

6 - month sub - periods

12 - month sub - periods

Source: Group estimates

Part III: Statistical effect

Is RSI a stable and reliable indicator?

The calculation for volatility,

The statistical results are given below

VaR (Norm Dist)

Source: Group estimates

Source: Group estimates

: The mean of returns.

: The number of sub samples (i.e. the number of observations)

: The standard error of returns.

: The given probability.

The result is as below:

Source: Group estimates

(MSE is the estimation of population variance, =

With degree of freedom as 2n 2, the results computed are as below:

P-Value (one tail)

Source: Group estimates

Appendix 1: Singapore Interest Rates and Interest Margin

Appendix 2 Income without friction cost

Appendix 3: Income with friction cost of 2%

6 month sub periods income generated, RSI (18)

12 month sub periods income generated, RSI (18)

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