Relative Strength

Relative Strength
Different Types of Relative Strength
Score Methods
Comparing Price Performance: Apple vs. - InvestorsBusinessDaily
or IBD Ranks
RRG Relative Rotation Graphs
Relative Strength concept
The RSI is a single-security indicator which measures "overbought/oversold"
conditions of that security where RS compares two different securities
in order to facilitate a choice.
RS is often referred to as Comparative Relative Strength or
Relative Strength Comparative etc.
Relative Rotation Graphs are based on this Comparative Relative
Strength concept.
The formula to calculate Relative Strength is simple:
RS = Price of security A / Price of security B
The outcome of this formula is a (RS) line that usually is plotted
in combination with the price chart of security A.
The interpretation of this Relative Strength line or "Raw
Relative Strength" as I often call it is very straight forward.
When the RS line moves up the Consumer Staples sector is outperforming
the broader market and should be "overweight" in portfolios.
When the RS line is moving down the Consumer Staples sector is
under performing the broader market and should be "underweight".
RRG indicators
JdK RSRatio
"JdK RS-Ratio", this is a proprietary indicator
that uses a normalization algorithm which takes into account not
only the comparison against the benchmark but also the comparison
to all other elements in the universe. The result is a line that
oscillates around the 100-level, where values above 100 indicate a positive
trend in the RS-line and vice versa. This indicator enables "ranking"
of a universe and basically answers the question: "What
are your best five stocks/sectors/....etc."
JdK RSMomentum
JdK RS-Momentum line is a normalized measure of the Rate of Change
of the JdK RS-Ratio line.
Momentum line leads the Ratio line. When the RS-Momentum line
crosses above the 100-level a low has been formed in the RS-Ratio line
(see vertical dashed green line) which started to move up. And vice
versa, when the RS-Momentum line crosses below the 100-level a top
has been set in the RS-Ratio line which then has started to move down.
As the values of the JdK RS-Ratio and the JdK RS-Momentum lines
are comparable across the universe they can be used to rank securities
based on RS-ratio or RS-momentum or any combination of these two.
RRG Construction
RRG Construction
The construction of Relative Rotation Graphs is based on a scatter
The RRG takes two inputs.
The JdK RSRatio values on the xaxis (horizontal)
and the JdK RSMomentum values on the yaxis (vertical).
The center point of the plot (100,100) is the base or the benchmark
against which all elements in the plot are measured.
This means that in the top right-hand quadrant, the Leading
quadrant, items will show up that are exhibiting a positive trend in their
relative strength and this positive trend is still being pushed higher
by a positive momentum. As wel all know momentum, or rate of change,
is a leading indicator. So as soon as the pace of the RS-Ratio line
starts to fade its rate of change will start to decline. When the rate
of change turns negative, the RS-Ratio line has formed a top and
started to decline.
At this moment, when the JdK RS-Momentum line drops below the
100-level, the item moves into the lower right-hand, the weakening, quadrant.
If the weakness in relative strength persists and the negative
momentum continues to push the RS-Ratio line down below the 100-level
(on the RS-Ratio axis) the element moves into the lower left-hand
quadrant of the plot, the lagging quadrant.
The up-turn follows the same anatomy as the down-turn. The first
thing that will happen is that JdK RS-Momentum will start to pick up,
signalling that the pace of the down trend is faltering. When the RS-Momentum
line crosses above the 100-level a low has been formed in the RS-Ratio
line which by that time has started to move up. At that time, when RS-Momentum
crosses above 100, the item moves into the top left-hand quadrant, which
is labeled the improving quadrant. Items in this quadrant are
still showing a negative trend in relative strength but the worst
is over and the forming of a low is in process.
Eventually when this improvement continues the RS-Ratio line
will rise above the 100-level as well which brings it back into the
top right, leading, quadrant, completing a full rotation.
In order to put the move of an element through the RRG plot into
perspective the observations can be connected which creates a 'trail'.
This trail shows the rotation over the past n observations and as
it is based on a trend-following approach a continuation of that
rotation may be assumed under normal circumstances.
A static RRG plot shows the trail over the past n observations,
dynamic RRGs show the trail over time moving it forward one observation
at a time. This creates the 'snake-like' movement that
visualizes rotation of relative strength among elements in a universe.
What are RRGs?
RRGs or Relative Rotation GraphsTM (yes they are officially
TradeMarked) are a visualization method to picture the relative position
of all elements in a universe of securities against a benchmark
and against each other. This means that RRGs can save the user time
and provide additional insight which can not be achieved using
regular relative strength charts.
A 'universe' can really be a collection of any sort
of traded instruments/securities you like as long as their price
series are comparable! Plotting an equity index in combination with
a yield series in one RRG will cause problems on interpretation
because of the inverted nature of a yield graph. As long as all elements
of the universe are comparable RRGs can be used to analyse their
relative strength.
What are the trading rules for
As Relative Rotation Graphs are a visualisation method there
are no fixed trading rules. It is best to compare a RRG with a regular
chart. A very aggressive trader may want to buy a 5-bar breakout while
a more conservative trader would like to buy a 20-bar breakout.
Interpretation on RRGs is the same. A very aggressive trader
may want to look for buying (relative) opportunities when securities
cross into the top-left 'improving' quadrant while more
conservative traders may want to wait until the security reaches the top-right
'leading' quadrant.
My RRG looks like spaghetti?
When you bring up a Relative Rotation Graph with a lot of securities,
say the S&P 100, at first the chart may look like spaghetti
As a rule of thumb you can say that the cluttered securities around
the middle (=benchmark) of the plot are not worth exploring as they
are moving, more or less, in line with the benchmark. The more interesting
securities are found on the edges of the plot making the bigger rotations.
Both RRG on Bloomberg and the RRG-toolbox on MA offer the opportunity
to toggle the trails on or off so you can quickly identify the securities
that you may want to do a further analysis on.
Relative Strength Rank Indicator
This indicator is a ranking tool used to compare a group of stocks,
ETFs or futures contracts to determine which specific instrument
is performing best.
The indicator creates a score based upon the symbols historical
price movement.
You can then compare this score to the other RS Rank scores of
other stocks or ETFs in your basket of trading instruments.
Thus, you can simply pick the instrument with the highest RS
Rank score when creating a momentum based trading system.
Formula Calculation
( ( Long Term Price Change + Short Term Price Change ) / 2 ) / 10 Day
The RS Rank is computed by taking the average of a long-term price
change with a short term price change.
This average is then divided by the 10-day Average True Range.
This will produce a ranking score which can be compared to other
Here is an example
We want to use 140 days as our Long Term Price change and 20 days
for our Short Term Price Change. Thus we get:
( ( Close-Close[140] + Close-Close[20] ) / 2 ) / 10 Day ATR
Analytical Toolbox:
Trading Relative Strength
Basic Process
Relative Strength [RS] approaches vary by measures used and
time frames selected. The measures must be normalized so that an
apples-to-apples comparison can be made. This is critical for assessing securities
with significantly different prices.
In addition to normalizing the RS measure, Michael Carr, CMT,
suggests addressing the volatility of different securities by incorporating
a standard deviation [SD] calculation to reduce overall risk.
An outline of two RS approaches
that use
a shorterterm, normalized measure
and a longerterm, normalized measure is provided here.
In both cases a risk-adjustment is made by dividing the RS measure
by the individual security's 26-week standard deviation
prior to ranking the group.
This particular system uses the nine primary S&P Select
Sector S&P SPDR™ exchange traded funds [ETFs] which collectively
comprise the S&P® 500 Index (SPX).
Calculation Steps
RS Calculation
Short Term
The short-term RS measure is calculated by dividing the ETFs
3-day Relative Strength Index [RSI] by its 14-day RSI.
A ratio value greater than one results when the shorter-term
RSI is larger than the longer-term RSI.
Divide 3 Day RSI by 14 Day RSI
Those ETFs with a greater short-term relative strength are
then ranked first.
Long Term
2 The long-term RS measure aims to capture trends that are more
persistent and is calculated by dividing the ETFs 14-week RSI by its 26-week
In each case a second risk-adjusted ranking is completed by
dividing the RS measure by its 26-week standard deviation.
RS Signal
The RSI Ratio values are maintained daily and weekly, respectively,
and the nine SPDRs ranked on Fridays (Thursday if the markets are
closed on Friday).
Two SPDRs are held with all four systems based on their relative
rankings. The system signals are generated and implemented as follows:
RS Rank
Calculate the RSI Ratio and rank SPDRs at the end of the trading
Trading Signals
Buy Signal
Buy the top two ranked SPDRs (#1 & #2) at the close on the first
trading day in the week that follows (usually a Monday).
Hold Signal
Hold the ETF the following week if it remains ranked in the top
third rankings (#1through #3).
Sell Signal
If the SPDR drops below a rank of 3, sell the SPDR at the close on
the first trading day in the week that follows (usually a Monday).
StockCharts Technical Rank (SCTR)
The StockCharts Technical Rank (SCTR) is a numerical score
that ranks a stock within a group of stocks.
Stocks are assigned a score based on six key indicators, which
cover different timeframes.
These indicator scores are then sorted and assigned a technical
Using SCTR tables, chartists can sort stocks according to their
technical rank.
This makes it easy to identify the technical leaders and laggards
within a specific group.
It takes two steps to calculate the StockCharts Technical Rank
First, each stock is “scored” based on six different technical
These six indicators can be subdivided
into three groups:
and shortterm.
The box below details these indicators, the relevant timeframe
and the weightings.
LongTerm Indicators (weighting)
* Percent above/below 200day EMA
* 125Day RateofChange (30%)
MediumTerm Indicators (weighting)
* Percent above/below 50day EMA
* 20day RateofChange (15%)
ShortTerm Indicators (weighting)
* 3day slope of PPOHistogram
* 14day RSI (5%)
Price Relative / Relative Strength
Chartists can also use the Price Relative to compare the performance
of a stock to its sector or industry group.
This makes it possible to determine if a stock is leading or lagging
its peers.
The Price Relative indicator can also be used to find stocks
that are holding up better during a broad market decline or showing
weakness during a broad market advance.
Even though this article focused on using the Price Relative
for stocks, the Price Relative can also be used for broad market
The stock market can be broken down into nine sectors represented
by the sector SPDRs.
Chartists can maintain charts with Price Relatives for these
nine sectors to determine the leaders and the laggards.
The market is in offensive mode when the technology, and consumer
discretionary sectors lead.
The market is in defensive mode when consumer staples, healthcare
and utility sectors lead.
Once the leading sectors have been determined, chartists can
then look within these sectors to find the leading stocks.
As with all indicators, it is important to use the Price Relative
in conjunction with other technical analysis tools.
momentum oscillators and chart patterns can be used to confirm
or refute relative strength or relative weakness.
Sectors that show relative weakness can be avoided to help narrow
the search.
Measuring Performance With Relative
Strength Percentile Rank
Relative Strength Percentile Ranks
Another way relative strength is communicated in Stock Investor
Pro is through percentile ranks.
Percentile rank shows you how a particular company compares
to all the companies in the database.
Percentile rank fields are useful in comparing a company’s
results in a certain area against that of the entire universe of companies,
but they are not available for all data points.
Within the program tabs, the percentile rank data, if available,
is usually designated by Rank or % Rank.
Measuring Performance With
Relative Strength
Price Ratio (Relative Strength)
The Price Ratio is calculated using the ratio of closing price
to that of another security, on the first day of the chart.
This means that the starting point of the Price Ratio will vary
according to the Time Period selected.
The line may appear to move if you change time periods, but the
slope remains the same.
The steps required to calculate the Price
Ratio are best illustrated by an example:
Calculate the Price Ratio of IBM to the Dow Jones Industrial
Average (DJI)-
Calculate the Inverse Ratio on
Day 1: DJI divided by IBM.
Divide IBM by DJI each day
Then multiply step 2 by the Inverse
Ratio in step 1
The Price Ratio then reduces the start to zero by subtracting
1 (from step 3).
Relative Strength
Relative Strength is calculated as follows:
Determine the Intercept Ratio
- the ratio between the closing price of the two data sets on the
specified intercept date.
Determine the closing price ratio on the
current date (stock 1/stock 2).
Multiply the result by the Intercept
Ratio and subtract 1.
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In that lagging quadrant we find the elements of which relative
strength is in a down trend which is still being pushed further down by
weak momentum.