Comparative Relative Strength

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Introduction

Comparative Relative Strength Indicator (CRS) is the financial indicator that shows how a price of stocks, options or other securities presents itself in relation with another price, index or a sector over specified period of time. To put it in another way, CRS divides one price field by another price field. Comparative Relative Strength is generally used to relate a security's performance with a market index (to see if some security is outperforming or underperforming compared to the market index). It is a simple but efficient way of calculating the profitability of stocks, options, ETFs, futures, mutual funds or currencies in general. Comparative Relative Strength Indicator should not be confused with RSI (Relative Strength Indicator) which is completely different indicator in nature. Similar in name, the two indicators have different interpretations; the latter is useful in the calculus of overbought and oversold stock positions and its formula is completely different.

Calculation

Comparative Relative Strength Indicator is a ratio, where price of the first security is divided by the second (base) security price (or index, or sector). The result of this division gives us relationship or proportion between the two prices.

CRS = first security price / base security price

One of the primary comparisons happens when comparing two securities to show how those securities are performing relative to each other. The CRS indicator attempts to find which security price is outperforming or underperforming when compared to the base price.

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Interpretation

As a mathematical rule, the higher the result of a division, the higher the numerator; so, the larger the CRS, the better the first price is doing when compared with the second.

In financial terms, when the CRS indicator is moving up, the first security is outperforming the second and investment in that security is safer one. When the CRS indicator is moving sideways and the ratio between them remains the same both securities are performing likewise in correlation and are on the same level. If the CRS indicator decreases, the first security is underperforming compared to the second one. All CRS values above 1.0 shows that a security is outperforming the base price, while any value below 1.0 shows underperformance.

Comparative Relative Strength is generally used to relate a security's performance with a market index. As the CRS amplifies, the first security is more valuable and considered to be a good performer; whilst when the CRS indicator diminishes, the security is considered to be a weak performer.

Mostly, the Comparative Strength Indicator ratio is applied by traders in deciding which security to buy or sell, helping to pinpoint the best and the worst performers. CRS is also used in the design of spread trades where trader will buy the better performing security and sell the weaker one. Furthermore, the CRS indicator is also used for tweaking and improving the existing security portfolios and maximizing returns, since ratios give a better grasp of the financial situation in general.

Conclusion

Comparative Relative Strength Indicator is used to compare price of the stock with its other group members or an index. Comparative Relative Strength is calculated by dividing the price of first security with the required sector or security. Because of its simplicity CRS Indicator is easily interpreted. If the indicator is moving up it means that the former stock is performing better than the base security and investment is a safer one. If it’s moving sidewise it means that both securities are performing likewise and are on the same level. The downward motion is an indicator of bad performance of former security as compared to the base stock and can generate losses over the run. One of the wide applications of the Comparative Relative Strength Indicator is to develop spreads over a security or a required sector. These spreads are used to indicate the outperformed securities that are safer to retain for gaining profits. Similarly the indicated underperforming securities can be sold to minimize the possible loss. Comparative Relative Strength Indicator should not be confused with Relative Strength Indicator or RSI which is entirely different from CRS. The RSI is used to determine the over sold or over bought securities, not the relative comparison of base and required stock like CRS.