Price Relative (Relative Strength)
The Basics
The Price Relative(relative Strength) analyses the relationship between two instruments.
Indicator Type
Relative performance Indicator
Markets
All cash and futures, not options, although primarily used in the equities markets.
Works Best
All market types and time frames.
Formula
A simple ratio of A / B.
Select the item to be used as “B.”
Select the “Result” box to bring up a colour pallet.
Parameters
n/a
Theory
Price relative, also known as relative strength or just ratio, can show when the relationship between the items has changed. It can also be used to display one instrument in an alternate form. By plotting the ratio of unlike items gold and euros, one could see the price of gold denominated in another currency.
Interpretation
Price relative charts help the trader exploit the relationship between two instruments without regard to overall market direction. For example, they can help determine if an industry group such as autos is leading or lagging the market. Trendlines applied to the chart can tell us when that relationship is changing and therefore creating a trading opportunity. This also allows for performance analysis – hence the name relative strength – between two stocks or indices or even asset classes without regard to absolute market direction.
The old saw says to buy the strongest stocks in the strongest groups, Price relative allows for quick analysis in this area.
The chart type used is usually a line chart. Trend lines, moving averages and other technical tools can then be applied to analyse the plot like any single instrument. The most important aspects of the analysis are trends and trend breaks.
Rio spent most of 2016 in a sideway trend, albeit with a choppy range. However, in November 2016 it hit resistance levels the price relative chart vs. the ASX Metals and Mining Sector broke through its trendline. It took several weeks before price moved above its trendline for a breakout on an absolute basis.
Price relative showed the shifting sands as the sector started to outperform before it was obvious on the “regular” price chart above. The study’s alternate name “relative strength” highlights the objective of finding sectors that are starting to gain favour.
Math
A simple ratio of the first item to the second: A / B