Risk management using a relative strength index based on a mean-variance portfolio

Sayyed Mohammad Reza Davoodi ¹ ( )

Submited date : 2025-03-18 Accepted date : 2025-07-07

Keywords: Technical Analysis, Relative Strength Index, Mean-Variance Portfolio, Weighted Cumulative RSI.,

Abstract :

The Relative Strength Index (RSI) is one of the oscillators widely used in technical analysis. The present study aims to manage risk in strategies based on this oscillator by introducing a Relative Strength Index based on the mean-variance stock portfolio. In this approach employs a stock portfolio instead of a single asset and extends the RSI to a weighted cumulative RSI, where the weights are derived from mean-variance portfolio optimization. The study’s sample portfolio consists of eight indices from the Tehran Stock Exchange -tse- over the period from 1380 to September 1403 (Islamic calendar), and the optimization of the portfolio is carried out using the Particle Swarm Optimization (PSO) algorithm. The performance of the optimized portfolio indicates that its average daily return is approximately twice the risk-free rate. In contrast, applying the conventional RSI to the portfolio stocks resulted in negative average daily returns and, ultimately, losses.

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