Relative Strength

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Relative Strength by Mind Map: Relative Strength

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2. Different Types of Relative Strength Score Methods

2.1. Comparing Price Performance: Apple vs. Priceline.com - InvestorsBusinessDaily or IBD Ranks

2.1.1. InvestorsBusinessDaily

2.1.2. Two helpful tools on all three counts are IBD's Relative Price Strength Rating and the Relative Strength line.

2.1.2.1. IBD's Relative Price Strength Rating

2.1.2.2. IBD's Relative Strength line

2.1.3. The RS Rating gauges a stock's performance vs. all other stocks in IBD's database over the past 12 months.

2.1.3.1. Stocks like Mellanox Technologies (MLNX), with a 99 rating, have outperformed 99% of all stocks tracked by IBD over the past 12 months.

2.1.3.2. An RS rating of 90 or better means a stock is already outperforming 90% or more of the market — even before possibly breaking out and starting its run.

2.1.3.3. But like any other measure, a high RS Rating doesn't guarantee a winning run; it alone is not a buy signal, but simply one element helping you increase the odds of making money.

2.1.3.4. A stock that has sprinted straight up for weeks or months is likely to hold a high RS rank. But it will often be extended, with no real buy point in sight.

2.1.3.5. The trick is to find a stock that has managed to build or maintain a high RS Rating while basing.

2.1.4. The Relative Strength line gauges a stock's performance vs. the S&P 500 index.

2.1.4.1. A rising line means the stock is outperforming the broader market. That's good.

2.1.4.2. What you ultimately want to see is a stock near a buy point, showing a high RS Rating (say, 90 or better) with an RS line that in most cases is near or breaking to new highs.

2.1.4.3. IBD research shows, from 1950 through 2008, the average RS Rating of the best-performing stocks just prior to their winning runs was 87.

2.1.4.4. Read More At Investor's Business Daily: http://education.investors.com/investors-corner/617137-understand-the-relative-price-strength-rating.htm#ixzz377HitgjF

2.1.4.5. Follow us: @IBDinvestors on Twitter | InvestorsBusinessDaily on Facebook

2.2. RRG - Relative Rotation Graphs

2.2.1. Relative Strength concept

2.2.1.1. Untitled

2.2.1.1.1. 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.

2.2.1.1.2. RS is often referred to as Comparative Relative Strength or Relative Strength Comparative etc.

2.2.1.1.3. Relative Rotation Graphs are based on this Comparative Relative Strength concept.

2.2.1.1.4. The formula to calculate Relative Strength is simple:

2.2.1.1.5. RS = Price of security A / Price of security B

2.2.1.1.6. The outcome of this formula is a (RS) line that usually is plotted in combination with the price chart of security A.

2.2.1.2. Interpretation

2.2.1.2.1. The interpretation of this Relative Strength line or "Raw Relative Strength" as I often call it is very straight forward.

2.2.1.2.2. When the RS line moves up the Consumer Staples sector is outperforming the broader market and should be "overweight" in portfolios.

2.2.1.2.3. When the RS line is moving down the Consumer Staples sector is under performing the broader market and should be "underweight".

2.2.2. RRG indicators

2.2.2.1. JdK RS-Ratio

2.2.2.1.1. "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."

2.2.2.2. JdK RS-Momentum

2.2.2.2.1. JdK RS-Momentum line is a normalized measure of the Rate of Change of the JdK RS-Ratio line.

2.2.2.2.2. 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.

2.2.2.3. 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.

2.2.3. RRG Construction

2.2.3.1. RRG Construction

2.2.3.1.1. The construction of Relative Rotation Graphs is based on a scatter plot.

2.2.3.1.2. The RRG takes two inputs.

2.2.3.1.3. The center point of the plot (100,100) is the base or the benchmark against which all elements in the plot are measured.

2.2.3.2. LEADING

2.2.3.2.1. 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.

2.2.3.3. WEAKENING

2.2.3.3.1. 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.

2.2.3.4. LAGGING

2.2.3.4.1. 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.

2.2.3.4.2. 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.

2.2.3.5. IMPROVING

2.2.3.5.1. 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.

2.2.3.6. FULL ROTATION

2.2.3.6.1. 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.

2.2.3.7. TRAIL

2.2.3.7.1. 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.

2.2.3.7.2. 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.

2.2.4. Points

2.2.4.1. What are RRGs?

2.2.4.1.1. 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.

2.2.4.1.2. 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.

2.2.4.2. What are the trading rules for RRGs?

2.2.4.2.1. 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.

2.2.4.2.2. 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.

2.2.4.3. My RRG looks like spaghetti?

2.2.4.3.1. 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

2.2.4.3.2. 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.

2.2.4.3.3. 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.

2.3. Relative Strength Rank Indicator - systemtradersuccess.com

2.3.1. Info

2.3.1.1. 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.

2.3.1.2. The indicator creates a score based upon the symbols historical price movement.

2.3.1.3. You can then compare this score to the other RS Rank scores of other stocks or ETFs in your basket of trading instruments.

2.3.1.4. Thus, you can simply pick the instrument with the highest RS Rank score when creating a momentum based trading system.

2.3.2. Formula Calculation

2.3.2.1. ( ( Long Term Price Change + Short Term Price Change ) / 2 ) / 10 Day ATR

2.3.2.2. The RS Rank is computed by taking the average of a long-term price change with a short term price change.

2.3.2.3. This average is then divided by the 10-day Average True Range.

2.3.2.4. This will produce a ranking score which can be compared to other instruments.

2.3.2.5. Here is an example

2.3.2.5.1. We want to use 140 days as our Long Term Price change and 20 days for our Short Term Price Change. Thus we get:

2.3.2.5.2. ( ( Close-Close[140] + Close-Close[20] ) / 2 ) / 10 Day ATR

2.4. Analytical Toolbox: Trading Relative Strength

2.4.1. Basic Process

2.4.1.1. 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.

2.4.1.2. 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.

2.4.1.3. An outline of two RS approaches that use

2.4.1.3.1. a shorter-term, normalized measure

2.4.1.3.2. and a longer-term, normalized measure is provided here.

2.4.1.4. 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.

2.4.1.5. 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).

2.4.2. Calculation Steps

2.4.2.1. RS Calculation

2.4.2.1.1. Short Term

2.4.2.1.2. Long Term

2.4.2.1.3. In each case a second risk-adjusted ranking is completed by dividing the RS measure by its 26-week standard deviation.

2.4.2.2. RS Signal

2.4.2.2.1. 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).

2.4.2.2.2. Two SPDRs are held with all four systems based on their relative rankings. The system signals are generated and implemented as follows:

2.4.2.3. RS Rank

2.4.2.3.1. Calculate the RSI Ratio and rank SPDRs at the end of the trading week.

2.4.2.4. Trading Signals

2.4.2.4.1. Buy Signal

2.4.2.4.2. Hold Signal

2.4.2.4.3. Sell Signal

2.5. StockCharts Technical Rank (SCTR)

2.5.1. The StockCharts Technical Rank (SCTR) is a numerical score that ranks a stock within a group of stocks.

2.5.1.1. Stocks are assigned a score based on six key indicators, which cover different timeframes.

2.5.1.2. These indicator scores are then sorted and assigned a technical rank.

2.5.1.3. Using SCTR tables, chartists can sort stocks according to their technical rank.

2.5.1.4. This makes it easy to identify the technical leaders and laggards within a specific group.

2.5.2. Calculation

2.5.2.1. It takes two steps to calculate the StockCharts Technical Rank (SCTR).

2.5.2.2. First, each stock is “scored” based on six different technical indicators.

2.5.2.3. These six indicators can be subdivided into three groups:

2.5.2.3.1. long-term,

2.5.2.3.2. medium-term

2.5.2.3.3. and short-term.

2.5.2.4. The box below details these indicators, the relevant timeframe and the weightings.

2.5.3. Formulas

2.5.3.1. Long-Term Indicators (weighting)

2.5.3.1.1. * Percent above/below 200-day EMA (30%)

2.5.3.1.2. * 125-Day Rate-of-Change (30%)

2.5.3.2. Medium-Term Indicators (weighting)

2.5.3.2.1. * Percent above/below 50-day EMA (15%)

2.5.3.2.2. * 20-day Rate-of-Change (15%)

2.5.3.3. Short-Term Indicators (weighting)

2.5.3.3.1. * 3-day slope of PPO-Histogram (5%)

2.5.3.3.2. * 14-day RSI (5%)

2.6. Price Relative / Relative Strength - stockcharts.com

2.6.1. Chartists can also use the Price Relative to compare the performance of a stock to its sector or industry group.

2.6.1.1. This makes it possible to determine if a stock is leading or lagging its peers.

2.6.2. 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.

2.6.3. Conclusions

2.6.3.1. Even though this article focused on using the Price Relative for stocks, the Price Relative can also be used for broad market analysis.

2.6.3.2. The stock market can be broken down into nine sectors represented by the sector SPDRs.

2.6.3.3. Chartists can maintain charts with Price Relatives for these nine sectors to determine the leaders and the laggards.

2.6.3.4. Points

2.6.3.4.1. The market is in offensive mode when the technology, and consumer discretionary sectors lead.

2.6.3.4.2. The market is in defensive mode when consumer staples, healthcare and utility sectors lead.

2.6.3.4.3. Once the leading sectors have been determined, chartists can then look within these sectors to find the leading stocks.

2.6.3.4.4. Sectors that show relative weakness can be avoided to help narrow the search.

2.6.3.4.5. As with all indicators, it is important to use the Price Relative in conjunction with other technical analysis tools.

2.6.3.4.6. momentum oscillators and chart patterns can be used to confirm or refute relative strength or relative weakness.

2.7. Measuring Performance With Relative Strength - Percentile Rank

2.7.1. Relative Strength Percentile Ranks

2.7.1.1. http://www.aaii.com/stock-investor-pro/article/2-measuring-performanc

2.7.1.2. Another way relative strength is communicated in Stock Investor Pro is through percentile ranks.

2.7.1.3. Percentile rank shows you how a particular company compares to all the companies in the database.

2.7.1.4. 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.

2.7.1.5. Within the program tabs, the percentile rank data, if available, is usually designated by Rank or % Rank.

2.7.2. Measuring Performance With Relative Strength

2.7.2.1. http://www.aaii.com/stock-investor-pro/article/2-measuring-performance-with-relative-strength?adv=yes

2.8. Price Ratio (Relative Strength) - incrediblecharts.com

2.8.1. Points

2.8.1.1. The Price Ratio is calculated using the ratio of closing price to that of another security, on the first day of the chart.

2.8.1.2. This means that the starting point of the Price Ratio will vary according to the Time Period selected.

2.8.1.3. The line may appear to move if you change time periods, but the slope remains the same.

2.8.2. The steps required to calculate the Price Ratio are best illustrated by an example:

2.8.2.1. Calculate the Price Ratio of IBM to the Dow Jones Industrial Average (DJI)-

2.8.2.2. Calculate the Inverse Ratio on Day 1: DJI divided by IBM.

2.8.2.3. Divide IBM by DJI each day

2.8.2.4. Then multiply step 2 by the Inverse Ratio in step 1

2.8.2.5. The Price Ratio then reduces the start to zero by subtracting 1 (from step 3).

2.8.3. Relative Strength Formula

2.8.3.1. Relative Strength is calculated as follows:

2.8.3.2. Determine the Intercept Ratio

2.8.3.2.1. - the ratio between the closing price of the two data sets on the specified intercept date.

2.8.3.3. Determine the closing price ratio on the current date (stock 1/stock 2).

2.8.3.4. Multiply the result by the Intercept Ratio and subtract 1.