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Relative Strength Index (RSI) Application in Identifying Trading Movements of Selected IT Sector Companies in India 1P

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Relative Strength Index (RSI) Application in Identifying Trading Movements of Selected IT Sector Companies in India 1P IJMBS VOL . 7, Iss UE 1, JAN - MARCH 2017 ISSN : 2230-9519 (Online) | ISSN : 2231-2463 (Print) Relative Strength Index (RSI) Application in Identifying Trading Movements of Selected IT Sector Companies in India 1P. Selvam, 2L. Rakesh 1Business Studies, Sree Sastha Institute of Engineering & Technology, Chennai, India 2Senior Business Analyst, The Royal Bank of Scotland, Chennai, India Abstract The other variation of computing RSI: The stock market has been an integral part of the economy of any RSI = 100 X (1/(D/D+U) RSI – 100 ((100/U) /( 1+U/D)) country. The stock market plays a pivotal role in the growth of the Where, industry and commerce of the country that would subsequently D = an average of downward price change affect the economy of the country to a great extent. In the recent U = an average of upward price change past, share market investment has become one of the predominant As mentioned early, RSI usually makes fluctuation between 0 investment avenues for investors. Hence, investors wishing to make to 100. RSI peaks are an indication of overbought levels and an investment in share market are required to be conversant with suggest price tops, while RSI troughs are an indication of oversold share market trading practices, price fluctuations and appropriate levels and share price bottoms. Two horizontal lines are normally time for buying and selling securities. This article is proposed to drawn at 30 (indicating an oversold area) and 70 (indicating an apply the momentum oscillator by the name “Relative Strength overbought area). These two RSI lines can be adjusted depending Index – (RSI)” for figuring out an overbought and oversold on the market environment. Sometimes these lines can be moved condition of a script based on which investors can take prudent to 40 and 80 in bullish markets and be lowered to 20 and 60 in stock market investment decision. bearish markets. The RSI can stay overbought in bullish markets and oversold in bearish markets for long periods with which Keywords market movements can be understood. Price Fluctuations, Momentum Oscillator and Stock Market II. Literature Review I. Introduction The relative strength index was first introduced by Welles A. Falbo and Pelizzari (2011) Wilder in an article in the “Commodities” magazine in June It is mentioned that there are many different methods of technical 1978. Subsequently, calculations and analysis of the RSI had analysis, or different technical indicators. Not surprisingly, the been provided in his book “New concepts in Technical Trading profitability of technical indicators has long been subject to debate Systems”. The RSI is a price-following momentum indicator that in the academic literature. It is likely also true that the profitability moves between 0 and 100. It measures the internal strength of a of technical indicators actually changes over time, as suggested share by monitoring and analyzing changes in the closing prices. by Lim and Brooks (2011). The RSI usually tops above 80 or 70 and bottom below 40 or 30. Wide-used method of analyzing the RSI is to look for divergence B. Mitra (2011) in which the security in making a new high, but the RSI could fall It is suggested that moving average based technical trading rules to suppress its previous high. This divergence acts as an indication are profitable in the stock market of India. Analyzing a survey of an impending reversal. When the RSI then turns down and of 692 fund managers in five countries, Menkhoff (2010) finds falls below its most recent through, it is said to have completed a that the vast majority of them do use technical analysis, which is “failure swing”. The failure swing is considered a confirmation indirect evidence that technical analysis is useful in actual trading of the impending reversal. Divergences occur when the price and.investment. Szakmary. of script make new high (or low), but this is not confirmed by a new high (or low) in the RSI. Price mostly correct and above in C. Shen and Sharma (2010) the direction of RSI. The most significant signal is generated on It is suggested that trend-following technical trading strategies “Bullish” or “bearish” divergences between the RSI and the price are profitable in the commodity futures market. And, Menkhoff of the share. The RSI is a simple formula. Copious variations of the and Taylor (2007) try to explain why technical analysis could be same formula have been used in the computations of the RSI. profitable. The basic formula calculating RSI is as follows: III. Objectives RSI = 100-(100 / (1+RS) Where A. To Figure Out the Appropriate Time for Buying or RS = average of upward price change (increase price level change) Selling Scripts over a selected number of days / average of downward (decrease Being an astute player (investor) in the stock market, one must price level change) price change over the same number of days. have clear ideas in identifying an appropriate time to buy or sell Wilder recommended using a 14-day RSI. Since then, the 9-day the shares. Because failing to have these ideas will lead to doomed and 25-day RSIs have also been used. When smaller number of failure in investment which will subsequently cause great loss. days is taken fr calculating the RSI, the indicator is subject to Therefore, this paper helps investors mapping out their investment more volatility. by using Relative Strength Index application. 34 INTERNATionAL JOURNAL OF MANAGEMENT & BUsinEss STUDIES www.ijmbs.com ISSN : 2230-9519 (Online) | ISSN : 2231-2463 (Print) IJMBS VOL . 7, Iss UE 1, JAN - MARCH 2017 B. To Identify the Overbought and Oversold Condition Identifying overbought and oversold status of script is imperative and it helps investors know whether to buy or sell or retains the shares. Hence, if shares have been overbought, it is an indication to sell the shares and vice versa. IV. Data Collection Secondary Data obtained for this study is mostly from the website of National Stock Exchange and Bombay Stock Exchange. Historical data (share price) of 3 Informational Technology companies have been obtained for 2 months (20th December to 31st January) and analysis has been done using “7 days RSI” application V. Application Tool Relative Strength Index (RSI) RSI indicates the overbought (70) and oversold levels (30) to Relative Strength = Average gain / Loss traders. RSI signals help professional traders make the right RSI = 100 - (100/1+RS) trading decisions and allow them to quickly exit and enter the Rule of thumb: RSI over 70 suggests overvaluation and hence financial market. The signal tells traders to buy when the value selling where as value around 30 suggest undervaluation or buying. crosses above the oversold line and sell when the signal crosses In other words, the lower RSI is, the more people have sold which below the overbought line. The RSI is, thus, a stylish indicator can be a good time to get in. Buy around 30, sell after 65 that generates buy and sell signals, illustrates overbought and Interpretation of Relative Strength Index: oversold conditions, confirms price trend and movement, and Below 50 : Bearish can show potential price reversals through divergence. The RSI Above 50 : Bullish offers smooth movements which conveniently fit into an orderly Between 50 and 70 : Bullish package between 0 and 100. Between 70 and 100 : Overbought Below 30 : Oversold VI (Data Analysis) Relative Strength Index of HCL Technologies Ltd. Table 1: Results Obtained by Applying RSI Date Price Gain / Loss Gain Loss Average Gain Average Loss RS RSI 20-Dec-16 830 Nil Nil Nil Nil Nil Nil Nil 21-Dec-16 821 -9.35 0 9.35 Nil Nil Nil Nil 22-Dec-16 817 -3.7 0 3.7 Nil Nil Nil Nil 23-Dec-16 794 -23.35 0 23.35 Nil Nil Nil Nil 26-Dec-16 790 -3.35 0 3.35 Nil Nil Nil Nil 27-Dec-16 805 14.45 14.45 0 Nil Nil Nil Nil 28-Dec-16 803 -1.85 0 1.85 Nil Nil Nil Nil 29-Dec-16 819 16.35 16.35 0 2.06 5.94 0.35 25.78 30-Dec-16 828 8.6 8.6 0 4.40 5.94 0.74 42.54 2-Jan-17 829 0.55 0.55 0 5.63 4.61 1.22 54.99 3-Jan-17 835 6.65 6.65 0 5.71 4.08 1.40 58.32 4-Jan-17 857 21.8 21.8 0 6.66 0.74 8.96 89.96 5-Jan-17 845 -12.3 0 12.3 9.77 0.26 36.97 97.37 6-Jan-17 814 -30.25 0 30.25 7.71 2.02 3.81 79.22 9-Jan-17 838 23.9 23.9 0 7.71 6.08 1.27 55.91 10-Jan-17 838 -0.45 0 0.45 8.79 6.08 1.45 59.11 11-Jan-17 833 -4.6 0 4.6 7.56 6.14 1.23 55.16 12-Jan-17 848 14.45 14.45 0 7.48 6.80 1.10 52.38 13-Jan-17 850 2.55 2.55 0 8.59 6.80 1.26 55.82 16-Jan-17 831 -19.7 0 19.7 5.84 6.80 0.86 46.21 17-Jan-17 838 7.2 7.2 0 5.84 7.86 0.74 42.65 18-Jan-17 844 6.3 6.3 0 6.87 3.54 1.94 66.03 19-Jan-17 844 0.1 0.1 0 4.36 3.54 1.23 55.20 20-Jan-17 839 -5.4 0 5.4 4.37 3.47 1.26 55.74 23-Jan-17 857 18.55 18.55 0 4.37 3.59 1.22 54.94 24-Jan-17 849 -8.5 0 8.5 4.96 3.59 1.38 58.03 www.ijmbs.com INTERNATionAL JOURNAL OF MANAGEMENT & BUsinEss STUDIEs 35 IJMBS VOL .
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