Relative strength
Type
-
Short introduction
Relative strength compares the price behavior of several securities to each other, i.e. their performance. This is particularly useful for comparing different shares with their index.
Statement
If a share has a high relative strength compared to its index, it outperforms the index, i.e. it has higher percentage price gains and lower percentage price falls than the index. Similarly, shares with low relative strength show lower percentage price gains and greater percentage price losses than the underlying index.
Relative strength is calculated on an ongoing basis and is therefore subject to constant change, which in turn reveals trends and enables further analysis.
Formula/calculation
To determine the relative strength, the close of the share is divided by the close of the benchmark. This quotient is then divided by the quotient from the division Close n days ago by Close of the comparative value n days ago. The result is a ratio that fluctuates around 1.
where:
CA = Close of the analyzed share
CB = Close of the comparison value
Interpretation
Relative strength shows the relative performance of a share to a benchmark (index). The relative strength of the comparison value is 1. If the share has an RS > 1, it has a higher relative performance, analogously for RS < 1 a lower performance. For values close to 1, the share and the index have an identical relative performance.
Relative strength is an important tool for stock selection, as stocks with high relative strength are recommended. In addition, partial (e.g. sector) indices can also be compared with a more comprehensive index.
Default setting
- none; daily calculation
Basic trading systems
- None