Indicator - Relative Strength
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Definition Relative Strength
This indicator represents the evolution of a security's price compared to another one. (a stock, a market index)
In order to study the relative strength of a stock compared to a market index we calculate the ratio.
Ratio = price of the security/price of the index.
Then, calculate the difference Diff = ratio(t)-ratio(t-1) and finally the percentage of variation.
Interpretation Relative Strength
The relative strength compares the evolution of two securities.This indicator is used to represent the correlation between two securities or generally between a security and its sectoral index. For instance, you can compare the evolution of an automobile security relative to its automobile sector index.
When the relative performance is going up, it means that the first security is outperforming the second (named the reference) and when the relative strength decreases, it means that the first security is underperforming the second.
