INTRODUCTION TO STRATEGY

The Relative Strength Ranking Strategy is a long/short strategy which involves buying and selling of stock based on their
relative strength ranking. The idea behind the strategy is to sell the weak stock and buy the strong. Stop loss, take profit
and trail profit also followed based on the system. This trading strategy currently consider basket of stocks listed in F&O
segment. The goal is to protect and generate profit from this trading strategy from market swings up or down.

HOW THE STRATEGY WORKS?

The Strategy gives weightage to various indicators like MACD, ROC, moving average and other propriety indicator on the
universe of selected stocks from derivative segment. It then ranks the stocks on the basis of strength of their momentum.
The stocks are then bifurcated between bullish and bearish. With the help of these parameters, positions are
recommended to be initiated. Generally Long and Short positions are built in the market so the positions are near market
neutral however the value of total long stocks and the value of short stocks will not be the same. Also if stoploss get
triggered in one side then the value of other side could be partially/fully unhedged. Depending on the market conditions,
positions can also be recommended in equity markets only long positions/only short positions/through options route
and hedging may also be recommended through index futures.

KEY FEATURES OF RELATIVE STRENGTH RANKING

Robust In house propriety indicator for ranking the stock strength.

Continuous monitoring and tracking of positions is recommended.

Rigorously back-tested strategy

The universe of the stock are selected from F&O segment.

Positions are taken with the horizon of 4 days.

Every fourth day old basket position will be closed and new basket will be taken as per inhouse model.

Stop loss as per model is followed

This is a market neutral and absolute return strategy

Generally in trending market, in case of downtrend, stock whcih have been bought will fall less or their stoploss will

get triggered and the stocks which have been sold will fall more hence giving good profit.

KEY ADVANTAGES OF RELATIVE STRENGTH RANKING

Long and short positions are built in the market so the positions are generally market neutral.

The strategy is less volatile and thus reduces the risk of major drawdown.

Proper money management is implemented to improve risk reward ratio.

The strategy passes out through some internal technical checks also that serve as the benchmarks of a robust

algorithmic strategy.

Exposure in F&O market hence, benefit of leverage

KEY CONCERNS WITH RELATIVE STRENGTH RANKING

Liquidity risk: As this is a derivative strategy, it may be difficult to square off positions in case of extreme adverse

market conditions or if regulatory intervention affects trade in F & O segment.

Gap: In case of gap up and gap down all the stop loss of one side may get triggered.

Satyam kind of fiasco can cause big losses as there is no circuit filters in F&O stocks.

The value of total long stocks and the value of short stocks will not

be same. Also if stoploss get triggered in one side then the value of
other side could be partially / fully unhedged.

This

strategy is suitable only for investors having

high risk appetite.

Low

SUITABILITY

Medium

High

RISK RETURN MATRIX

Risk

RELATIVE STRENGTH RANKING STRATEGY (RSR)

Updated till December 2013

Low

Medium

Return

High

Updated till December 2013

RELATIVE STRENGTH RANKING STRATEGY

Risk Control Measures

As the risk of gap cannot be ruled out however proper stop loss and money management Is recommended to
control the risk.

To statistically verify benefits offered by this strategy we undertook a back testing study. We have considered
the period January 2008 to December 2012, for the same but the actual results may vary from back tested results
2008
Month

2009
Profit

2010

Month

Profit

2011

Month

Profit

MONTH

2012
Profit

Month

Profit

Jan

8.32%

Jan

2.75%

Jan

-1.30%

Jan

2.40%

Jan

4.28%

Feb

2.66%

Feb

2.18%

Feb

1.99%

Feb

3.17%

Feb

1.99%

Mar

6.15%

Mar

3.54%

Mar

4.04%

Mar

1.78%

Mar

1.27%

Apr

1.68%

Apr

3.29%

Apr

2.43%

Apr

-0.22%

Apr

3.62%

May

5.65%

May

-6.20%

May

3.46%

May

3.39%

May

2.67%

Jun

4.14%

Jun

5.79%

Jun

-1.19%

Jun

1.31%

Jun

2.11%

Jul

2.17%

Jul

4.36%

Jul

0.54%

Jul

1.43%

Jul

3.04%

Aug

1.42%

Aug

1.89%

Aug

2.74%

Aug

5.46%

Aug

2.34%

Sep

6.29%

Sep

1.96%

Sep

0.56%

Sep

2.25%

Sep

2.52%

Oct

3.45%

Oct

4.61%

Oct

1.95%

Oct

3.09%

Oct

0.10%

Nov

2.43%

Nov

2.72%

Nov

4.79%

Nov

3.35%

Nov

2.27%

Dec
Total

5.62%

Dec

2.33%

Dec

2.04%

Dec

3.10%

Dec

2.44%

49.98%

Total

29.22%

Total

22.05%

Total

30.51%

Total

28.65%

ACTUAL RESULT ANALYSIS (JANUARY 2013 TO DECEMBER 2013) - 12 Months

2013
MONTH

Profit

Jan

1.30%

Feb

-2.04%

Mar

4.88%

Apr

7.47%

May

-0.08%

Jun

12.40%

Jul

8.07%

Aug

-2.36%

Sep

6.13%

Oct

-14.34%

Nov

5.01%

Dec

5.34%

Total

31.78%

Annualized 33.09%

Actual returns are net of all expenses

* The strategy in few months had run as long only and in cash segment also.

NIFTY RETURN V/S STRATEGY RETURN (JAN 2008 - DEC 2013)

1600

Nifty

Strategy

1400
1200
1000
800
600
400
200
0
2008

2009

2010

2011

2012

Dec- 2013

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RELATIVE STRENGTH RANKING STRATEGY

Updated till December 2013

AVERAGE MONTHLY RETURNS (6 YEARS)

(After expense)

2008

4.17%

2009

2.44%

2010

1.84%

2011

2.54%

2012

2.39%

2013

2.65%

RESULT SUMMARY (72 MONTHS)

Total no of profitable months

64

Total no of losing months

Maximum booked profit

12.40% (Jun-13)

Maximum booked loss

-14.34% (Oct-13)

Average monthly profit (72 Months)

2.67%

Average annualized profit (6 Years )

34.14%

Return volatility (Monthly)

3.32%

Return volatility (Annual)

11.50%

Our back-tested and actual results of last 72 months

data show that above strategy had given profit in
64 months.

STATISTICAL ANALYSIS
Total returns in
positive months

Total Returns in
negative months

Standard deviation (returns)

2008

49.98%

7.64%

2009

35.42%

-6.20%

10.29%

2010

24.54%

-2.49%

6.59%

2011

30.73%

-0.22%

4.90%

2012

28.65%

3.67%

2013

50.59%

-18.82%

23.88%

* Risk free rate used for calculating sharpe ratio : 2008 = 9.0%, 2009 = 7.5%, 2010 = 7.5%, 2011 = 8.5%, 2012 = 8.5% 2013 = 8.25%

FREQUENCY DISTRIBUTION OF STRATEGY RETURNS (JAN 2008- DEC 2013) (TOTAL 72 MONTHS)
<=9%

6% to 9%

3% to 6%

24

0% to 3%

33

-3% to 0%

-6% to -3%

-9% to -6%

<=-9%

1
0

10

15

20

25

30

35

3
1

Updated till December 2013

DATE

RSR STRATEGY RETURN

NIFTY RETURN

Jan-13

1.30%

2.80%

Feb-13

-2.04%

-5.66%

Mar-13

4.88%

-0.18%

Apr-13

7.47%

4.11%

May-13

-0.08%

3.51%

Jun-13

12.40%

-7.21%

Jul-13

8.07%

3.96%
-8.44%

Aug-13

-2.36%

Sep-13

6.13%

8.75%

Oct-13

-14.34%

7.09%

Nov-13

5.01%

-3.29%

Dec-13

5.34%

3.07%

31.78%

8.51%

Total
* Above returns are net of all expenses

STRATEGY V/S NIFTY RETURN

15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%

RSR Strategy

Dec-13

Nov-13

Oct-13

Sep-13

Aug-13

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

-20.00%

Jan-13

RELATIVE STRENGTH RANKING STRATEGY

LAST 8 MONTHS ACTUAL PERFORMANCE TRACKER (JAN 2013 TO DEC 2013)

Nifty

CONCLUSION
It has been observed that the back tested and actual results of above strategy had generated average return of more than
25% per annum from 2008 to December 2013. Average monthly returns for last 72 months are 2.67% per month.
SMC Research would only provide research recommendation based on this strategy and it is the client who would be
responsible for all his trades.
Note: The research team continuously tries to improve the strategy which is necessary and desirable due to
the dynamic nature of market and the reality check being done by our research team. The investor should
read this research recommendation note every month for any changes done in the strategy.

IMPORTANT NOTICE- RISK DISCLAIMER

Derivative trading is a high risk investment. Trading in the derivative markets on margin carries a high level of risk, and may not be
suitable for all investors. The high degree of leverage offered in the option markets can work against you as well as for you. This is not a
solicitation to invest and you should carefully consider your financial situation as to the suitability to your situation prior to making any
investment or entering into any transaction. You should make yourself aware of all the risks associated with derivative trading and seek
advice from an independent financial advisor if you have any questions or concerns. Past performance is not indicative of future results,
as returns may vary according to market conditions. Trading

in derivative is speculative and may involve the loss of

principal or more therefore, investors trading under strategy should deploy risk capital only, that if lost will not significantly
affect one's personal financial well being. No representation is being made that trading under in Relative Strength Ranking trading
program will necessarily lead to profit. Investors may incur into a series of consecutive losses and substantial draw-

downs that can deplete their funds before the occurrence of any meaningful profit accumulation. SMC will not be liable for any
damage to your account.

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