RS ratio and Momentum calculations
Knowing how the formula works, helps to understand and interpret the values on the RRG charts.
I used ChatGPT and this article on Z-score to understand the formula.
The formula itself was picked from An0n1mity/RRGPy.
Relative strength measures the stock's performance in comparison to a benchmark index like NIFTY 50.
A rising RS indicates the stock is outperforming the Index and and a declining RS shows under performance.
The Relative strength of a stock is determined by dividing the stock price with the benchmark index.
Multiplying the result by 100, gives a percentage measure.
The first part, subtracts the RS from it moving average. This measures how the RS performs against its average. A positive value indicates the RS is above average and vice versa.
The second part, divides the resulting value with the standard deviation of RS.
The result is a multiple of the Std.Dev. (How many standard deviations is the RS from its average.). Values can be above or below 0.
The final step adds 100 to serve as a baseline. All values are now above or below 100.
The first part, divides RS ratio by its value from a previous period. This compares the current RS to its old value.
- A positive value indicates an increase and vice versa.
- An unchanged RS ratio will result in 1. We correct this in the next step.
The second part, reduces 1 and normalizes the values. If the RS ratio is unchanged, the result in 1. Reducing 1 makes it 0. All values are now centered around 0.
The final part, converts the result into a percentage change relative to the old value.
To calculate the momentum value, we apply the same earlier Z-score standardization formula.
To summarize, both the RS ratio and RS momentum are multiples of Standard deviation.