Application of technical trading rules on Indonesian construction and bank stock exchange using random walk hypothesis

Certain decisions like when to buy or sell stocks are of utmost importance for investors. To shed light on this aspect, our study undertakes an exploration of several technical trading rules that are based on the random walk hypothesis, specifically focusing on the Indonesian stock market. We utilize the variance ratio test to initially determine if the fluctuations in stock prices follow a random pattern. Additionally, we characterize the market utilizing the Efficient Market Hypothesis. Various technical trading rules such as the moving average crossover, which employs a combination of fast and slow moving averages, the Bollinger band, using upper and lower bands, and the relative strength index using the RSI indicator, are put to use. These techniques aim to generate buy and sell signals for stocks. We subsequently attempt to pinpoint the most beneficial technical trading rule by comparing the profit outcomes to a basic buy-and-hold strategy. Moreover, we seek potential predictor variables that might influence the return from these technical trading rules. The outcomes of our research indicate that the Indonesian stock market does not strictly follow the random walk hypothesis and can be classified as possessing weak form efficiency. The applied technical trading rules resulted in returns that were lower than those from the buy-and-hold strategy. Furthermore, our regression analysis pointed towards low adjusted R-square values, suggesting that the identified predictor variables had limited influence on the returns. Hence, we concluded that, within the Indonesian stock market context, the importance of technical trading rules is relatively minor.