Mind Map Gallery Relative Strength
A comprehensive mind map about the different types of relative strength - Score Methods.Edited at 2021-07-18 14:01:14
Different Types of Relative Strength Score Methods
Comparing Price Performance: Apple vs. Priceline.com - InvestorsBusinessDailyor IBD Ranks
Two helpful tools on all three counts are IBD's RelativePrice Strength Rating and the Relative Strength line.
IBD's Relative Price Strength Rating
IBD's Relative Strength line
The RS Rating gauges a stock's performance vs. all otherstocks in IBD's database over the past 12 months.
Stocks like Mellanox Technologies (MLNX), with a 99 rating,have outperformed 99% of all stocks tracked by IBD over the past 12months.
An RS rating of 90 or better means a stock is already outperforming90% or more of the market — even before possibly breaking out andstarting its run.
But like any other measure, a high RS Rating doesn't guaranteea winning run; it alone is not a buy signal, but simply one elementhelping you increase the odds of making money.
A stock that has sprinted straight up for weeks or months is likelyto hold a high RS rank. But it will often be extended, with no realbuy point in sight.
The Relative Strength line gauges a stock's performancevs. the S&P 500 index.
A rising line means the stock is outperforming the broader market.That's good.
What you ultimately want to see is a stock near a buy point, showinga high RS Rating (say, 90 or better) with an RS line that in mostcases is near or breaking to new highs.
IBD research shows, from 1950 through 2008, the average RS Ratingof the best-performing stocks just prior to their winning runswas 87.
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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 securitiesin order to facilitate a choice.
RS is often referred to as Comparative Relative Strength orRelative Strength Comparative etc.
Relative Rotation Graphs are based on this Comparative RelativeStrength 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 plottedin combination with the price chart of security A.
The interpretation of this Relative Strength line or "RawRelative Strength" as I often call it is very straight forward.
When the RS line moves up the Consumer Staples sector is outperformingthe broader market and should be "overweight" in portfolios.
When the RS line is moving down the Consumer Staples sector isunder performing the broader market and should be "underweight".
"JdK RS-Ratio", this is a proprietary indicatorthat uses a normalization algorithm which takes into account notonly the comparison against the benchmark but also the comparisonto all other elements in the universe. The result is a line thatoscillates around the 100-level, where values above 100 indicate a positivetrend in the RS-line and vice versa. This indicator enables "ranking"of a universe and basically answers the question: "Whatare your best five stocks/sectors/....etc."
JdK RS-Momentum line is a normalized measure of the Rate of Changeof the JdK RS-Ratio line.
Momentum line leads the Ratio line. When the RS-Momentum linecrosses 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 viceversa, when the RS-Momentum line crosses below the 100-level a tophas 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 linesare comparable across the universe they can be used to rank securitiesbased on RS-ratio or RS-momentum or any combination of these two.
The construction of Relative Rotation Graphs is based on a scatterplot.
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 benchmarkagainst which all elements in the plot are measured.
This means that in the top right-hand quadrant, the Leadingquadrant, items will show up that are exhibiting a positive trend in theirrelative strength and this positive trend is still being pushed higherby 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 linestarts to fade its rate of change will start to decline. When the rateof change turns negative, the RS-Ratio line has formed a top andstarted to decline.
At this moment, when the JdK RS-Momentum line drops below the100-level, the item moves into the lower right-hand, the weakening, quadrant.
If the weakness in relative strength persists and the negativemomentum continues to push the RS-Ratio line down below the 100-level(on the RS-Ratio axis) the element moves into the lower left-handquadrant of the plot, the lagging quadrant.
In that lagging quadrant we find the elements of which relativestrength is in a down trend which is still being pushed further down byweak momentum.
The up-turn follows the same anatomy as the down-turn. The firstthing 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-Momentumline crosses above the 100-level a low has been formed in the RS-Ratioline which by that time has started to move up. At that time, when RS-Momentumcrosses above 100, the item moves into the top left-hand quadrant, whichis labeled the improving quadrant. Items in this quadrant arestill showing a negative trend in relative strength but the worstis over and the forming of a low is in process.
Eventually when this improvement continues the RS-Ratio linewill rise above the 100-level as well which brings it back into thetop right, leading, quadrant, completing a full rotation.
In order to put the move of an element through the RRG plot intoperspective the observations can be connected which creates a 'trail'.This trail shows the rotation over the past n observations and asit is based on a trend-following approach a continuation of thatrotation 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 observationat a time. This creates the 'snake-like' movement thatvisualizes rotation of relative strength among elements in a universe.
What are RRGs?
RRGs or Relative Rotation GraphsTM (yes they are officiallyTradeMarked) are a visualization method to picture the relative positionof all elements in a universe of securities against a benchmarkand against each other. This means that RRGs can save the user timeand provide additional insight which can not be achieved usingregular relative strength charts.
A 'universe' can really be a collection of any sortof traded instruments/securities you like as long as their priceseries are comparable! Plotting an equity index in combination witha yield series in one RRG will cause problems on interpretationbecause of the inverted nature of a yield graph. As long as all elementsof the universe are comparable RRGs can be used to analyse theirrelative strength.
What are the trading rules for RRGs?
As Relative Rotation Graphs are a visualisation method thereare no fixed trading rules. It is best to compare a RRG with a regularchart. A very aggressive trader may want to buy a 5-bar breakout whilea more conservative trader would like to buy a 20-bar breakout.
Interpretation on RRGs is the same. A very aggressive tradermay want to look for buying (relative) opportunities when securitiescross into the top-left 'improving' quadrant while moreconservative 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 aroundthe middle (=benchmark) of the plot are not worth exploring as theyare moving, more or less, in line with the benchmark. The more interestingsecurities are found on the edges of the plot making the bigger rotations.
Both RRG on Bloomberg and the RRG-toolbox on MA offer the opportunityto toggle the trails on or off so you can quickly identify the securitiesthat you may want to do a further analysis on.
Relative Strength Rank Indicator systemtradersuccess.com
This indicator is a ranking tool used to compare a group of stocks,ETFs or futures contracts to determine which specific instrumentis performing best.
The indicator creates a score based upon the symbols historicalprice movement.
You can then compare this score to the other RS Rank scores ofother stocks or ETFs in your basket of trading instruments.
Thus, you can simply pick the instrument with the highest RSRank score when creating a momentum based trading system.
( ( Long Term Price Change + Short Term Price Change ) / 2 ) / 10 DayATR
The RS Rank is computed by taking the average of a long-term pricechange 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 otherinstruments.
Here is an example
We want to use 140 days as our Long Term Price change and 20 daysfor our Short Term Price Change. Thus we get:
( ( Close-Close + Close-Close ) / 2 ) / 10 Day ATR
Analytical Toolbox:Trading Relative Strength
Relative Strength [RS] approaches vary by measures used andtime frames selected. The measures must be normalized so that anapples-to-apples comparison can be made. This is critical for assessing securitieswith significantly different prices.
In addition to normalizing the RS measure, Michael Carr, CMT,suggests addressing the volatility of different securities by incorporatinga 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 measureby the individual security's 26-week standard deviationprior to ranking the group.
This particular system uses the nine primary S&P SelectSector S&P SPDR™ exchange traded funds [ETFs] which collectivelycomprise the S&P® 500 Index (SPX).
The short-term RS measure is calculated by dividing the ETFs3-day Relative Strength Index [RSI] by its 14-day RSI.
A ratio value greater than one results when the shorter-termRSI is larger than the longer-term RSI.
Divide 3 Day RSI by 14 Day RSI
Those ETFs with a greater short-term relative strength arethen ranked first.
2 The long-term RS measure aims to capture trends that are morepersistent and is calculated by dividing the ETFs 14-week RSI by its 26-weekRSI.
In each case a second risk-adjusted ranking is completed bydividing the RS measure by its 26-week standard deviation.
The RSI Ratio values are maintained daily and weekly, respectively,and the nine SPDRs ranked on Fridays (Thursday if the markets areclosed on Friday).
Two SPDRs are held with all four systems based on their relativerankings. The system signals are generated and implemented as follows:
Calculate the RSI Ratio and rank SPDRs at the end of the tradingweek.
Buy the top two ranked SPDRs (#1 & #2) at the close on the firsttrading day in the week that follows (usually a Monday).
Hold the ETF the following week if it remains ranked in the topthird rankings (#1through #3).
If the SPDR drops below a rank of 3, sell the SPDR at the close onthe first trading day in the week that follows (usually a Monday).
StockCharts Technical Rank (SCTR)
The StockCharts Technical Rank (SCTR) is a numerical scorethat ranks a stock within a group of stocks.
Stocks are assigned a score based on six key indicators, whichcover different timeframes.
These indicator scores are then sorted and assigned a technicalrank.
Using SCTR tables, chartists can sort stocks according to theirtechnical rank.
This makes it easy to identify the technical leaders and laggardswithin a specific group.
It takes two steps to calculate the StockCharts Technical Rank
First, each stock is “scored” based on six different technicalindicators.
These six indicators can be subdivided into three groups:
The box below details these indicators, the relevant timeframeand the weightings.
LongTerm Indicators (weighting)
* Percent above/below 200day EMA (30%)
* 125Day RateofChange (30%)
MediumTerm Indicators (weighting)
* Percent above/below 50day EMA (15%)
* 20day RateofChange (15%)
ShortTerm Indicators (weighting)
* 3day slope of PPOHistogram (5%)
* 14day RSI (5%)
Price Relative / Relative Strength stockcharts.com
Chartists can also use the Price Relative to compare the performanceof a stock to its sector or industry group.
This makes it possible to determine if a stock is leading or laggingits peers.
The Price Relative indicator can also be used to find stocksthat are holding up better during a broad market decline or showingweakness during a broad market advance.
Even though this article focused on using the Price Relativefor stocks, the Price Relative can also be used for broad marketanalysis.
The stock market can be broken down into nine sectors representedby the sector SPDRs.
Chartists can maintain charts with Price Relatives for thesenine sectors to determine the leaders and the laggards.
The market is in offensive mode when the technology, and consumerdiscretionary sectors lead.
The market is in defensive mode when consumer staples, healthcareand utility sectors lead.
Once the leading sectors have been determined, chartists canthen look within these sectors to find the leading stocks.
Sectors that show relative weakness can be avoided to help narrowthe search.
As with all indicators, it is important to use the Price Relativein conjunction with other technical analysis tools.
momentum oscillators and chart patterns can be used to confirmor refute relative strength or relative weakness.
Measuring Performance With RelativeStrength Percentile Rank
Relative Strength Percentile Ranks
Another way relative strength is communicated in Stock InvestorPro is through percentile ranks.
Percentile rank shows you how a particular company comparesto all the companies in the database.
Percentile rank fields are useful in comparing a company’sresults 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 WithRelative Strength
Price Ratio (Relative Strength) incrediblecharts.com
The Price Ratio is calculated using the ratio of closing priceto that of another security, on the first day of the chart.
This means that the starting point of the Price Ratio will varyaccording to the Time Period selected.
The line may appear to move if you change time periods, but theslope remains the same.
The steps required to calculate the PriceRatio are best illustrated by an example:
Calculate the Price Ratio of IBM to the Dow Jones IndustrialAverage (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 Formula
Relative Strength is calculated as follows:
Determine the Intercept Ratio
- the ratio between the closing price of the two data sets on thespecified intercept date.
Determine the closing price ratio on thecurrent date (stock 1/stock 2).
Multiply the result by the InterceptRatio and subtract 1.