ANALYSIS OF A STANDALONE USAGE AND LIMITATIONS OF RELATIVE STRENGHT INDEX INDICATOR IN STOCK TRADING

Abstract

In the stock trading community, a recent growth in number of traders, especially young ones, is quite visible and more and more investors are trying to find one turnkey tool that can work for rookie traders as well as seasoned professionals.  The purpose of this research is to analyze one of the proclaimed magic tools of trading called Relative Strength Index (RSI).  Researchers plan to examine and analyze a standalone usage of RSI as a sole determinant of investment decisions.  RSI indicator is one of the five most popular technical indicators and it is very often used in assessment of stock direction but unfortunately some inexperienced investors are relying too much on this one tool and use it for analysis and trading of various securities.   Secondary data will be used to analyze the signal strength and profit relation using regression and paired sample t-test.  The outcome of the study portrays that RSI indicator is highly unreliable due to a very weak coefficient of determination; hence the tool should be used only when coupled with other technical analysis indicators.  The main limitation of this study is in its breadth so in the future it could be used more widely across industries and various types of companies.