Applying directionality trading rules into a systematic equity trading strategy for beating the rate of inflation in Malaysia

• Published in: AIP Conference Proceedings
• Main Author: Mansor M.M.; Zahari S.M.; Ibrahim N.; Derasit Z.; Mohammed B.; Metcalfe A.V.
• Format: Conference paper
• Language: English
• Published: American Institute of Physics 2024
• Online Access: https://www.scopus.com/inward/record.uri?eid=2-s2.0-85204971681&doi=10.1063%2f5.0228099&partnerID=40&md5=8af83a58b6d5b75ffae102316721d440

In most cases, the rate of inflation is always higher than either the return on investment (ROI) from safe assets or annual salary growth. It is also noted that a low ROI of cash investment is parallel to a low rate of investment risk. In contrast, equity investment has the potential to provide better ROI for every dollar being risked for the investment than the money market. Hence, investing in stocks could be a solution to maintain one's purchasing power or achieve financial goals. However, a high ROI from equity investment corresponds to a high risk of losing the investment capital, or worse, financial loss. Therefore, the focus of this paper is on equity investment aiming at protecting 100% of the investment capital and a minimum ROI of either more than the inflation rate or deposit rate. To achieve the objective, the scheme of risks associated with equity trading is marginalized by systematic trading strategies that incorporate directionality trading rules. The proposed investment simulations are implemented on the ten largest companies, by market capitalization for 2023, representing ten randomly selected sectors of Bursa Malaysia. Moving directionality suggests that rapid share price rises correspond to high log-return values but low directionality values. In contrast, the rapid fall in the share prices corresponds to low log-return values but high directionality values. The features inspire directionality trading rules for buying and selling shares. This is consistent with the famous "buy low, sell high"strategy to take advantage of market instability. Furthermore, this innovation allows for a buy-and-hold strategy implemented in the active trading simulations, and gross revenue is kept in a money market while waiting for the next buy. The sectorial investment performance suggests that the technology sector was the best sector to invest in during the investment period. The results also indicate that the proposed directionality trading criteria provide an opportunity to generate double-digit annual gross profits despite the challenges of the pandemic and economic uncertainties. © 2024 Author(s).