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What is the Relative Strength Comparison Indicator

What is the Relative Strength Comparison Indicator?

• Imagine you are looking to invest in the stock market and come across two companies within the same sector.
• Both offer promising growth prospects and deciding between the two can be a challenging task.
• This is where the relative strength comparative, or RSC indicator, comes into play.
• It provides a simple yet powerful way to gauge the performance of one security against another or an entire market index.

How Do I Calculate the RSC Indicator?

1. The calculation of the RSC indicator is remarkably straightforward.
2. The security you want to evaluate is placed in the numerator. Whereas the security or index against which you wish to benchmark its performance goes in the denominator.

RSC value = Price of the security you want to analyze or benchmark's price

1. For example, if you are contemplating investing in a leading automobile company (A) and find another equally appealing alternative (B) within the same sector, the RSC will be:

RSC value = A's price/B's price

How Do I Analyze the RSC Indicator?

Once you've calculated the RSC values for two securities, you need to plot these values over a time scale. By plotting your RSC values on a graph, you can track the performance trends of your chosen securities relative to the benchmark over a specific period.

• Horizontal movement: A horizontal line on the RSC graph signifies that the security is performing similarly to the benchmark.
• Upward movement: An upward trajectory on the RSC graph indicates that the security is outperforming the benchmark over time.
• Downward movement: Conversely, a downward movement on the RSC graph suggests that the security is underperforming the benchmark.

What are the Practical Applications of Analyzing RSC Values?

Some key applications include:

• Identifying momentum shifts: By observing the patterns and changes in RSC values over time, investors can identify shifts in momentum for individual securities.
• Fine-tuning portfolio diversification: Analyzing RSC values can aid in fine-tuning portfolio diversification strategies. A diversified portfolio often includes securities that perform differently under varying market conditions.
• Confirming investment decisions: If fundamental analysis suggests a potential investment opportunity, checking the RSC values can help validate whether the security has been consistently outperforming or underperforming compared to the market or its peers.

Conclusion

• The RSC indicator is a powerful tool for stock selection.
• Combining it with thorough research and fundamental analysis can empower us to make informed decisions.
• Just like spotting patterns in the market, identifying the right opportunities with RSC requires a keen eye. The position of RSC values over time will help gauge relative performance.