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Relative Price Performance

Hi!

I want to use a so-called “relative strength indicator” (I’m, not talking about Wilder’s RSI indicator) to measure the price performance of a stock vs. the price performance of an index or a sector. As I understand it, in StockCharts, there are three ways of doing it. This query is about the first method. I need to better understand the other two methods before using them.

One can create a chart using a “ratio ticker symbol” such as IBM:$SPX. In the chart, this would show the price of IBM divided by the price of the $SPX. Adding an MA(50) would show the trend. Uptrends mean that, price-wise, IBM’s is doing better than the $SPX (either rising faster or falling slower) and downtrends mean that IBM’s is doing worse than the $SPX (either rising slower or falling faster).

More importantly, to compare two stocks within the same sector, the last value of MA (50) tells the story of, more or less, the last three months. Am I right?

Thank you!

Dr. T


Comments

  • markdmarkd mod
    edited October 27
    Yes. The MA is the summary of values in its look back period.

    And, you are correct that the ratio indicator for RS is based on dividing the values of the symbols.

    A couple of notes (for others if you are already aware).

    If you use the "Price" indicator, you will get the same plotted value no matter the length of the chart, which is the simple ratio of the two prices.

    If you use the "Price-Performance" indicator, the plotted value will vary depending on the length of the chart, and it is plotted as a per cent. The per cent value represents how much the first symbol has out-performed or under-performed the second (base) value since the first bar in the chart.

    The "Price-Performance" method makes it a little easier to compare one stock to another over the same number of bars (e.g., ABC is up 7% in the last 9 months, compared to 12% for XYZ).

    As for MA length, a calendar month has 19 to 23 trading days, depending on the number of days in the month (28, 29, 30 or 31) and holidays in the month (none, 1 or 2). Some people use 20 to represent a month (four weeks times 5 days in a week). I like 21 for the indicators I use, based on 251 trading days in a year (52 wks x 5 days = 260-9 holidays = 251) divided by 12 months = 20.9 days=21). So for me, three months is 63 days and that's the MA I use for RS. But 50 is more popular and either will convey useful information. My impression is, the shorter MA will signal earlier, but yields more whipsaws (so max gain on a good trade, but more small losses), while the longer is later but fewer false alarms (fewer forced losses but less profit on good signals).
  • Dear MarkD,

    Thank you for your reply!

    I read about the "Price" and the "Price Performance" indicators but I was somewhat confused and I have to re-read the material. Am sure I'll have questions about the two.

    Dr. T
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