Advance Decline Line For FTSE STI Stocks

In the world of technical analysis, there are numerous methods of judging whether a market participants are bullish or bearish. One such indicator is the advance and decline line. If we were to use this method to trade the Straits Times Index, can we make money?

The way I calculate the advance and decline line is as follows:

• Step 1. Obtain the number of gainers, number of losers and number of unchanged stocks that are in the 30 FTSE STI Index


• Step 2. Compute the difference between the number of gainers and number of losers


• Step 3. Compute the cumulative sum of the values obtained in Step 2.
  
• Step 4. Based on the series obtained in Step 3, compute a 13 day RSI. Lets call this AD RSI to differentiate it from normal RSI.

Below is the graph of the 13 Day AD RSI for the past 3 years.

There are only 8 instances whereby the AD RSI values drop below 30.

Lets formulate a simple trading rule based on this observation

• Whenever the AD RSI drops below 30 wait for AD RSI to rise above 30


• When AD RSI rise above 30, buy 1 lot of STI Index.


• Once long position is entered, hold the trade for 20 trading days before exiting.

Based on this simple trading method, we have the following trades




We are able to capture the rebound in Aug 07, Jan 08.

Lets see how the 2 opened trades perform next week.