Relative Strength Index for Developing Effective Trading Strategies in Constructing Optimal Portfolio

摘要

Today's investors' dilemma is choosing the right stock for investment at right time. There are many technical analysis tools which help choose investors pick the right stock, of which RSI is one of the tools in understand whether stocks are overpriced or under priced. Despite its popularity and powerfulness, RSI has been very rarely used by Indian investors. One of the important reasons for it is lack of knowledge regarding how to use it. So, it is essential to show, how RSI can be used effectively to select shares and hence construct portfolio. Also, it is essential to check the effectiveness and validity of RSI in the context of Indian stock market. EPS and P/E ratio tend to reflect the profitability of a stock. It is also important to find which of the above better reflects the profitability of the organization so as to make better decisions regarding investment. In this case 20 stocks are chosen from NSE, 10 of which are based on highest P/E ratio and remaining 10 are based on highest EPS. Here, the portfolio consists of stocks both for short term investment and long term investment. For short term investment, we find 14 day RSI for all 20 scripts and for long term investment 56 day RSI is being found out for all the 20 scripts. RSI values are calculated for the time period 2011 January to 2013 December. Ten scripts that are chosen based on RSI from the 20 scripts are included in the portfolio. In order to find the validity of RSI in Indian stock markets, we evaluate the performance of short term investments by computing 14 day RSI for the chosen shot term investment stocks at a future point of time (March 2014), and the performance is evaluated by comparing it with the initial 14 day RSI. In this case most of the results proved positive, thus showing that RSI is valid in Indian stock markets. Also out of the 10 selected scripts six are the ones which have highest P/E ratio, this indicates that P/E ratio is a better indicator of profitability when compared to EPS.