Difference between Relative Strength and Relative Strength Index

With the introduction of computers and sophisticated charting tools, stock market trading has changed. A simple mobile app can give you graphs and charts that were only available to large traders years ago. If the context and nuances of advanced indicators and metrics are not fully understood, then even the availability of these advanced metrics and indicators may be limited in their utility. Many investors and traders are confused about the differences between relative strength, RSI and relative strength index. The names of both metrics are similar, which contributes to confusion. You will need to be able to distinguish between relative strength and relative strength indexes.

Relative strength

A relative strength is a method that compares the value a security to an index, benchmark or security. You can consider the relative strength part of the value-investing system. A ratio is a measure of relative strength. This is calculated by subtracting the base security from the security, benchmark or index that will be used to compare. To compare the BSE Sensex benchmark index, you'll need to divide the current security price by the level of the Sensex. You can also use another stock from the same sector, or a sectoral indicator to calculate the relative strength. It is important to compare stocks with strong historical correlations when comparing relative strength between peers.

Relative strength Index

The relative strength index , or RSI, is a technical tool for momentum investing. The RSI can be represented as an oscillator. This is a line graph that has two extremes. The RSI value is between 0 to 100. It is calculated by taking into account recent price movements. A stock with an RSI value greater than 70 indicates that it is in overbought territory. It is therefore overvalued. A value below 30 signifies that the stock is in oversold territory. Investors should consider another indicator to confirm the prevailing trend before taking action based only on the RSI.

Difference in Calculations

Simply divide the price of the base security by the value of the reference or security to get a relative strength comparison. Let's say you want to compare stock ABC with BSE Sensex. Simply divide the current price of ABC by the benchmark's current level. The relative strength of ABC will decrease if the price of ABC is Rs 1000 while Sensex is at 30,000.

The method of calculation is a major difference between relative strength (RSI) and relative strength (RSI). The relative strength index can be calculated quickly, but it is more difficult to calculate. It must be calculated in two steps.

RSI Step one= 100- [100/ 1+ Average Gain/average Loss]

The initial RSI is generally calculated using the 14 period value. The second level of the RSI formula is possible after data has been gathered from 14 intervals.

RSI step two = 100 - [100/ 1 + (previous avg. gain*13+current gain)/(previous avg. loss *13+current loss)]

This formula will calculate the value of RSI. It is usually plotted below the stock's price chart. The second formula smoothens out the result, so the value will be close to 0 or 100 during strong trends.

Use

Another factor that influences relative strength vs RSI is the utility of both indicators. The RSI, a momentum indicator, tells if security has oversold or underbought. If the RSI crosses the oversold area and forms a lower low that matches the stock's price, this is a sign of a bullish divergence. Any break above the oversold level can be used as a signal to enter a long position.

The historical value must be considered in order to make an actionable decision regarding relative strength. Investors can choose to take a short position in comparative security or a long position with base security if the relative strength ratio falls below the historical value.

Conclusion

Relative strength and RSI are essentially two different perspectives. The relative strength measures the stock's value in relation to other stocks, benchmarks, or indexes, while the RSI measures the stock's performance in relation to its most recent performance.