The Performance of Exponential Moving Average, Moving Average Convergence-Divergence, Relative Strength Index and Momentum Trading Rules in the Pakistan Stock Market

Abstract

Objective: To examine the performance of exponential moving average, moving average convergence and divergence, relative strength index and momentum rules in Pakistan stock market. Methods/Statistical Analysis: Exponential moving average, moving average convergence and divergence, relative strength index and momentum rules are applied on the daily closing prices of the KSE-100 index of Pakistan stock market covering the period 1 st January 1997 to 31 st December 2013. The predictability and profitability of these rules in Pakistan stock market was assessed by using simple t-test and "double or out strategy" respectively. Findings: Whole sample period results obtained by the application of EMA, MACD, RSI and MOM rules provided empirical evidence about EMA and MOM that all the variants of these rules possessed substantial prognostic capability and were able to make earnings superior to position trading. Nonetheless in the presence of transaction costs, only (1, 50, 1) and (1, 50, 0) variants of EMA, (12, 26, 9) and (8, 17, 9) variants of MACD and both variants of MOM were found to be profitable in Pakistan stock market. The division of the whole sample data on the basis of financial crisis and non-crisis eras disclosed that the applied trading rules provided more revenues during crisis than in non-crisis periods. This study is a remarkable contribution to the current literature on Pakistan stock market as previously very little research work has been carried out on this stock market. Application/Improvements: The findings of this study are novel and are hoped to be helpful for investors in Pakistan to earn maximum revenues with minimum risk of losing their hard earned money.