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Relative Strength vs. RSI: The Right Choice for Your Portfolio

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Published Date: 11 Oct 2023Updated Date: 11 Oct 20236 mins readBy MOFSL
Relative Strength vs. RSI

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.

 

Related Articles:  Beginners Guide on Illiquid Stocks | A Complete Guide on Forfeited Share | Candlestick Wick Interpretation

 

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Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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