What is Relative Strength?

• Relative strength (RS) measures an asset's performance compared to a chosen benchmark, like an index or another asset.
• It's expressed as a ratio, showing how the asset's price has performed relative to the benchmark.
• Investors use relative strength to identify which assets are outperforming or underperforming in the market.
• It helps in asset allocation and is essential to strategies like CANSLIM for stock selection.
• RS is a versatile tool that can be used with various asset classes, like stocks, bonds, commodities, and currencies.

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What is the Relative Strength Index?

• The relative strength index (RSI) is a momentum oscillator.
• It measures the change in price movements and the speed of such changes on a scale of 0 to 100.
• It was created by J. Welles Wilder.
• It's widely used to spot potential trend reversals, overbought (above 70), or oversold (below 30) conditions.
• RSI calculates average gains and losses over a chosen period to gauge momentum.
• Traders use RSI to make entry and exit decisions, especially in ranging markets.

How is Relative Strength Different From the Relative Strength Index?

Some key differences are:

• RS compares an asset's performance to a benchmark, while RSI measures an asset's internal momentum.
• RS is a ratio, whereas RSI is a bounded oscillator that ranges from 0 to 100.
• RS is relative, giving insight into relative performance, while RSI quantifies momentum.
• RS helps with asset allocation and portfolio management, while RSI aids in timing entry and exit points.
• RS can be applied broadly to asset classes, while RSI is mainly used for individual securities.

When to Use Relative Strength?

A trader can use RS while making the following trading decisions:

• When selecting assets for investment or trading.
• To allocate assets in a portfolio based on relative performance.
• For sector rotation strategies to identify top-performing sectors.
• To identify leading stocks or assets within a market.
• To gauge the relative strength of Indian stocks compared to global indices.

When to Use the Relative Strength Index?

A trader can use the relative strength index for the following trading decisions:

• To time entry and exit points in trading, especially for swing and momentum strategies.
• To identify potential trend reversals, overbought, or oversold conditions.
• In range-bound markets to spot price extremes.
• For divergence analysis to anticipate changes in price direction.
• To assess the momentum of Indian stocks, helping traders make timely decisions.

Conclusion

• RS assesses relative performance against a benchmark. The RSI gauges momentum and potential overbought or oversold conditions.
• Choose RS for asset allocation and benchmark comparisons. Opt for RSI for timing entry and exit points and spotting momentum shifts.
• Tailor your approach to suit your trading and investment objectives in the Indian market.

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