What is RPS:- RELATIVE PRICE STRENGTH?

What is RPS or RSC?

In very basic terms, RPS is a top down stock selection method. Stocks from different sectors expected to outperform the rest of the market are identified, and then stocks from these sectors are selected. The belief is that if you can select securities in superior sectors, these securities will perform along with their respective sectors. This follows the truth that money flows from underperforming areas of the market, to more profitable areas.

The best way to compare the strength of one security against a market index is to use the Relative Strength Comparison (RSC). The RSC actually compares a security's price change with that of a "base" or benchmark security. (in this case the SENSEX)

• If the RSC is increasing, it indicates that the security is performing better than the base security.

• If it moves sideways, it indicates that both securities are performing the same.

• If it is decreasing, it indicates that the security is performing worse than the base security.

It is important to note that just because the RSC may be rising in value, doesn’t mean the security is necessarily rising in value too. It simply indicates that the security is performing better than the base security. For example, a security may be falling in price however it may not be falling as fast as the base security, the result being that the RSC would strengthen. Conversely, if the RSC is falling the security may not be reducing in value; instead it may be that it’s increasing at a slower rate than the base security.

Interpretation of the results:

Interpreting the results is easy: a value greater than zero indicates that the market sector is outperforming the base index. A zero indicates that the market sector is performing on par with the base index, while a negative number indicates the market sector is underperforming the base index.

Remember a rising RSC value only indicates that the market sector is outperforming the base index. Sometimes if the RSC is rising in value, so too is the market sector. However, this isn’t always the case. Similarly, if the RSC is falling the market sector may not be reducing in value; it only indicates that it is underperforming the market index. This illustrates how important it is to also open the chart of the market sectors to analyse the trend.

To sum it up:

The RSC is a great way to utilise the power for Trading. Furthermore, it can be an extremely effective tool in identifying profitable trading opportunities. The downside for this type of system is that it is not a complete on its own and would need to be combined with other entry, exit and money management rules.

The potential is there however to create a very solid trading system that includes sector analysis.