Rrg relative strength investing
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This indicator reflects an uptrend in relative performance when above relative strength and a downtrend in relative performance when below relative weakness. The further the indicator is above , the stronger the uptrend in relative performance. The further the indicator is below , the stronger the downtrend in relative performance.
As with all trend-following indicators, such as moving averages, the trend-following model that powers RS-Ratio includes a lag period. This means there will already be upward movement in the price relative before RS-Ratio crosses above Conversely, there will already be downward movement in the price relative before RS-Ratio crosses below Similarly, the price relative bottomed in mid-July, but RS-Ratio did not cross above until mid-September.
This is typical for trend-following indicators that are designed to ignore the blips and focus on the trend. Keep in mind that the values for RS-Ratio can be compared when using the same benchmark security. As with price charts, chartists should keep in mind that momentum changes course before the trend actually reverses. Not all momentum moves, however, result in trend reversals. Consider an example using price and a moving average.
Price first moves towards the moving average and then crosses it if the move extends. Price, however, does not always cross the moving average to signal a trend reversal. Aggressive traders would more likely take a position as price moves towards the moving average because this means momentum is improving.
Conservative investors would more likely wait for price to move above the moving average because the trend has not fully reversed. RS-Momentum crossed above in mid-December and held mostly above for four weeks. Even though the indicator popped above briefly, this pop did not last long and quickly moved back below RRG Construction Relative Rotation Graphs are plotted on a standard scatter-plot canvas with an x-axis horizontal and a y-axis vertical.
These axes cross at to create four relative performance quadrants. The Relative Rotation Graph is shown above with four possible combinations. A positive RS-Ratio indicates an uptrend in relative performance and positive momentum means this trend is still pushing higher.
A positive RS-Ratio indicates an uptrend in relative performance, but negative momentum means this uptrend is stalling or losing power. A negative RS-Ratio indicates a downtrend in relative performance and negative momentum means this downtrend is still pushing lower. A negative RS-Ratio indicates a downtrend in relative performance, but positive momentum means this downtrend is stalling or potentially reversing.
Rotation Sequence The arrows on the model Relative Rotation Graph above show the idealized rotation, which is clockwise. Let's assume a sector is currently in the leading quadrant green and follow the idealized rotation. Remember, RS-Momentum is the leading indicator here and it will be the first to turn. From the leading quadrant, relative momentum will start to level off and RS-Momentum will move below , which will cause the sector to move into the lower right-hand quadrant weakening.
Extended weakness in relative momentum will ultimately affect the trend in relative performance and RS-Ratio will also move below , which would put the sector into the lagging quadrant red. Once in the lagging quadrant, the first sign of strength will be an improvement in relative momentum. When RS-Momentum crosses above , the sector will move into the improving quadrant blue.
A sector in this quadrant still has a downtrend in relative performance, but RS-Momentum is improving and this could foreshadow a move into the leading quadrant green. Extended strength in relative momentum will ultimately affect the trend in relative performance and RS-Ratio will move above This will push the sector into the leading quadrant green and the cycle will start over again.
Rotation Trails Rotation comes alive with the historical trails. The chart below shows the nine sectors with week trails; we can see each sector rotating from one quadrant to another. Each point marks one week, and the solid point with the symbol marks the most recent point. At the top, XLF moved from improving to leading. At the bottom, XLU moved from weakening to lagging. The blue line shows XLP moving from weakening to lagging, and then from lagging to improving.
Chartists can also glean information from the length of the trails and the thickness of the trail lines. All trail lines extend 12 weeks on this chart, but some are longer than others. The red XLU trail is the longest, meaning it has the biggest move and shows the most volatility. The green XLY line in the upper right is the shortest, which means it has the smallest move and is the least volatile.
The thickness of the lines depends on the distance from the benchmark, which is the crosshair on the RRG. Thicker lines will be further from the benchmark, and thinner lines will be closer to the benchmark. The further a security is from the benchmark, the bigger the move in relative performance up or down. The closer a security is to the benchmark, the smaller the move in relative performance up or down.
In other words, the thicker lines represent bigger moves and the thinner lines represent smaller moves. Users can change the trail length using the slider next to the Relative Rotation Graph. Chartists are encouraged to experiment with the trail length and the number of symbols on the graph.
In general, chartists should shorten the trail length when there are a lot of symbols on the graph. This will help de-clutter and make the analysis easier. Longer trails are fine when just a few symbols are shown on the graph. Interpretation Before looking at some interpretation guidelines, bear in mind that Relative Rotation Graphs are not a trading system and there are no predefined trading rules or signals. Look at RRGs as another type of charting method that is open to interpretation.
Different people looking at the same chart will come up with different interpretations. RS-Ratio is also the preferred metric for ranking a group of symbols. The table below each RRG ranks the symbols by quadrant according to their distance from the benchmark crosshair on the RRG. The strength of this indicator lies in its ability to visually plot the relative performances of multiple securities on a scatter-plot chart and most important, to show the rotation over a time period.
It is visually challenging to depict sector and asset class rotations on linear charts. RRGs tries to simply this task by categorizing securities within four relative performance quadrants and to define the four different stages of a relative trends as securities move from one quadrant to the other. These rotations tend to move in a clockwise fashion typically from the leading quadrant to the weakening quadrant, then to lagging quadrant, and finally back to the improving quadrant.
The objective is to help investors and traders differentiate the leaders from the laggards and to track securities that are weakening to those that are improving over a time period. For instance, the leading quadrant or the top right quadrant consist of securities that have RS-Ratio and RS-Momentum trading above These are the securities that are potential buy candidates.
Weakening quadrant are securities with RS-Ratios that are greater than but the RS-Momentums are trading below This quadrant depicts securities that may be undergoing a correction or are starting to show initial signs of a top.
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Keep in mind that the values for RS-Ratio can be compared when using the same benchmark security. As with price charts, chartists should keep in mind that momentum changes course before the trend actually reverses. Not all momentum moves, however, result in trend reversals.
Consider an example using price and a moving average. Price first moves towards the moving average and then crosses it if the move extends. Price, however, does not always cross the moving average to signal a trend reversal. Aggressive traders would more likely take a position as price moves towards the moving average because this means momentum is improving.
Conservative investors would more likely wait for price to move above the moving average because the trend has not fully reversed. RS-Momentum crossed above in mid-December and held mostly above for four weeks. Even though the indicator popped above briefly, this pop did not last long and quickly moved back below RRG Construction Relative Rotation Graphs are plotted on a standard scatter-plot canvas with an x-axis horizontal and a y-axis vertical. These axes cross at to create four relative performance quadrants.
The Relative Rotation Graph is shown above with four possible combinations. A positive RS-Ratio indicates an uptrend in relative performance and positive momentum means this trend is still pushing higher. A positive RS-Ratio indicates an uptrend in relative performance, but negative momentum means this uptrend is stalling or losing power.
A negative RS-Ratio indicates a downtrend in relative performance and negative momentum means this downtrend is still pushing lower. A negative RS-Ratio indicates a downtrend in relative performance, but positive momentum means this downtrend is stalling or potentially reversing.
Rotation Sequence The arrows on the model Relative Rotation Graph above show the idealized rotation, which is clockwise. Let's assume a sector is currently in the leading quadrant green and follow the idealized rotation. Remember, RS-Momentum is the leading indicator here and it will be the first to turn. From the leading quadrant, relative momentum will start to level off and RS-Momentum will move below , which will cause the sector to move into the lower right-hand quadrant weakening.
Extended weakness in relative momentum will ultimately affect the trend in relative performance and RS-Ratio will also move below , which would put the sector into the lagging quadrant red. Once in the lagging quadrant, the first sign of strength will be an improvement in relative momentum. When RS-Momentum crosses above , the sector will move into the improving quadrant blue.
A sector in this quadrant still has a downtrend in relative performance, but RS-Momentum is improving and this could foreshadow a move into the leading quadrant green. Extended strength in relative momentum will ultimately affect the trend in relative performance and RS-Ratio will move above This will push the sector into the leading quadrant green and the cycle will start over again.
Rotation Trails Rotation comes alive with the historical trails. The chart below shows the nine sectors with week trails; we can see each sector rotating from one quadrant to another. Each point marks one week, and the solid point with the symbol marks the most recent point. At the top, XLF moved from improving to leading. At the bottom, XLU moved from weakening to lagging. The blue line shows XLP moving from weakening to lagging, and then from lagging to improving.
Chartists can also glean information from the length of the trails and the thickness of the trail lines. All trail lines extend 12 weeks on this chart, but some are longer than others. The red XLU trail is the longest, meaning it has the biggest move and shows the most volatility. The green XLY line in the upper right is the shortest, which means it has the smallest move and is the least volatile.
The thickness of the lines depends on the distance from the benchmark, which is the crosshair on the RRG. Thicker lines will be further from the benchmark, and thinner lines will be closer to the benchmark. The further a security is from the benchmark, the bigger the move in relative performance up or down.
The closer a security is to the benchmark, the smaller the move in relative performance up or down. In other words, the thicker lines represent bigger moves and the thinner lines represent smaller moves. Users can change the trail length using the slider next to the Relative Rotation Graph. Chartists are encouraged to experiment with the trail length and the number of symbols on the graph.
In general, chartists should shorten the trail length when there are a lot of symbols on the graph. This will help de-clutter and make the analysis easier. Longer trails are fine when just a few symbols are shown on the graph. Interpretation Before looking at some interpretation guidelines, bear in mind that Relative Rotation Graphs are not a trading system and there are no predefined trading rules or signals.
Look at RRGs as another type of charting method that is open to interpretation. Different people looking at the same chart will come up with different interpretations. RS-Ratio is also the preferred metric for ranking a group of symbols. The table below each RRG ranks the symbols by quadrant according to their distance from the benchmark crosshair on the RRG. The leading quadrant green is first, the improving quadrant blue is second, the weakening quadrant yellow is third and the lagging quadrant red is last.
As the example below shows, XLK is the furthest from the benchmark in the leading quadrant and XLE is the furthest from the benchmark in the lagging quadrant. This often coincides with tail length because the securities with the longest tails are often the furthest from the benchmark. The rotational patterns are not always perfectly circular and will not always rotate through all four quadrants in a clockwise manner.
These are, after all, financial markets driven by fear and greed. A historical trail can remain on the right side of the RRG when there is a strong uptrend in relative performance. Conversely, a historical trail can remain on the left side of the RRG when there is a strong downtrend in relative performance. In general, a cross from the left half to the right half signals a new uptrend in relative performance.
Any sudden reversal to that trend will lead to negative results. To identify investment candidates, relative strength investors begin by observing a benchmark such as the Nasdaq Composite Index. They will then look to see which companies within that market have outperformed their peers, either by rising more rapidly than their peers or by falling less rapidly than them.
Because relative strength investing assumes that present trends will continue into the future, it is most effective in stable periods with minimal disruption. By contrast, chaotic periods such as the — financial crisis can be dangerous for relative strength investors because they can lead to sharp reversals of investment trends.
In those situations, investor psychology can suddenly reverse, with yesterday's investment darlings suddenly being shunned. Although momentum investing is often associated with individual stocks, it can also be applied to whole markets or industry sectors using index funds and exchange traded funds ETFs.
Similarly, investors can make relative strength investments in other asset classes, such as in real estate, using real estate investment trusts REITs. More exotic instruments, such as commodity futures , options , and other derivative products , can also be used. Strategies Employing Relative Strength Relative strength investing can also be used as one component of a larger strategy, such as pairs trading. As a relative strength investor, he periodically increases his allocation toward whichever asset is outperforming at that time.
In doing so, he hopes to benefit from the continuing trend of that asset's outperformance, effectively buying high and selling higher. In recent months, he has noticed that investors seem to be increasing their portfolio bond allocations at the expense of stocks. This inflow of money into the bond market has been raising bond prices and lowering yields.
He hopes to benefit from any ongoing outperformance of bonds relative to stocks. In technical analysis, the relative strength index RSI is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset.
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