In this article, we're going to unpack the Relative Strength (RS) or Relative Strength Comparative indicator.
Keep in mind that RS and RSI are different indicators. RS is used to compare the performance of one security against another security or a benchmark index. It's a measure of relative performance. RSI, on the other hand, is a momentum oscillator that measures the speed and change of price movements of a security. It's used to identify overbought or oversold conditions in a trading instrument.
Note that the article explains the calculation of the RS indicator using real-time data in an Excel file (download link below).
The RS is an handy indicator — a must-know for both beginners as well as seasoned investors as it helps us generate alpha (i.e beat the market).
Remember, it is of utmost importance that an active investor beats the market over a sufficient time period — if he is unable to, then it’d be better for him to invest his funds in a passive Nifty 50 index fund and spend his time in more productive endeavors, wouldn't it?
For instance, if Nifty 50 has provided 12% CAGR over past 10 years, then an active investor must beat this return — meaning they should generate a return of at least greater than 12% (post taxes and transaction charges) to justify spending time in the stock market.
The RS indicator helps us towards this goal by telling us how a particular stock is performing compared to a major index like say the Nifty 50, or even to the stock’s competitors in the same sector.
How?
The secret is in its formula: