While the Relative Strength and Relative Strength Index indicators might share similar names, it’s important to know the difference between the two. In this article, we’ll discuss their unique characteristics, offer insights into their differences, and help determine which one is best for you.
Understanding Relative Strength
Relative Strength (RS), a technique that allows traders to evaluate the performance of a specific security relative to other securities, is one example. For example, a trader may use Relative Strength to compare the performance of Microsoft’s MSFT stock to the S&P 500 and determine whether the stock is outperforming its benchmark.
The ratio is the measure of relative strength. It’s calculated by dividing the price of the chosen security by another. In this example, we would divide Microsoft’s current share price of approximately $280 by the market value of the S&P 500, around $3,980. This creates a relative strength value of 0.07.
In isolation, this figure doesn’t mean much. But plotted over time, it can show the trend of a security’s relative strength against a comparative security or benchmark. If this 0.07 value were to rise, it would mean that MSFT is outperforming the S&P 500, and vice…