School Corner
SCHooL CoRNER RELATIVE STRENGTH
INDICATOR EXPLAINED By THiERRy LADuguiE
The Relative Strength Indicator (comparative) compares two securities to show how they are performing relative to each other. A security’s price change is compared to another security’s price change (the base security). The relative strength is widely used in the stock market to compare a stock to an index. The guideline is to compare the stock to its index, for example if the stock is from the FTSE 100 index, the price of the FTSE 100 will be the base security. Note: Do not confuse relative strength with Relative Strength Index (RSI) which is a different indicator.
The indicator is calculated by dividing the security’s price by the base security. For example, Rio Tinto closed at 3511 on 31st December and on that day the FTSE 100 closed at 5897 and the relative strength was 0.595 (3511/5897). Two weeks later (15th January) Rio Tinto closed at 3490 and the FTSE 100 closed at 6117. The relative strength on that day was 0.570. In this example the relative strength declined because the stock went down while the FTSE 100 went up; the stock underperformed the FTSE 100.
“iN THiS ExAMPLE THE RELATiVE STRENgTH DECLiNED BECAuSE THE SToCk WENT DoWN WHiLE THE FTSE 100 WENT uP; THE SToCk uNDERPERFoRMED THE FTSE 100.”
February 2013
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