A Comparative Study of Relative Strength Index (RSI) Variants: Exploring Market Capitalisation as an Alternative Signal

This study introduces a new variant of RSI formula (named as RSIMC) that incorporates market capitalisation as an alternative signal for capturing corporate actions in RSI calculation, instead of using closing price. It aims to address the limitations in traditional RSI, capturing both corporate actions impact and market sentiments. The research aims to provide a more comprehensive view of market dynamics by accounting for corporate actions and capturing the magnitude of price changes. By using historical data from the closing prices of 20 selected Malaysian stocks and corporate actions occurring between July 2014 to June 2024 (10 years span), the study compares the performance of the newly-developed RSI formula with traditional RSI, RSIM and TN-RSI methods. The findings present comparative analyses of performance metrics, revealing that stop loss conditions improved significantly for complete trade frequency, while TN-RSI dominated most of the profitability metrices. Cross-sectional Net Profit revealed that RSIMC achieved the highest overall profitability without stop loss (18.3%), while TN-RSI slightly outperformed RSIMC under stop loss conditions (15.6% vs 14.9%), highlighting RSIMC‘s potential advantage in interpreting adjusted price signals arising from corporate actions. Paired t-tests against the respective RSI variants indicated no statistically significant differences, whereas per-stock t-tests produced mixed results.