Introduction
In technical analysis, Relative Performance is a commonly used tool that enables the comparison of the performance of an asset or security to another within a specific timeframe. This method is helpful in determining which asset is performing better than the other or assessing the overall strength of an asset relative to its peers or benchmark index.
To view relative performance, you must first choose or plot a benchmark index or another security or securities with a common reference point. ChartAlert then calculates the percentage change in the asset or securities you are analyzing over a particular time period and compares it to the percentage change in the benchmark index or reference security over the same time period. Positive relative performance indicates that the asset or securities you are analyzing have outperformed the benchmark index or reference security.
Relative performance can be valuable in identifying trends and potential market opportunities. If a stock consistently outperforms its benchmark index over the previous year, it could be a sign that the stock is undervalued and has strong potential for future growth. Conversely, if a stock underperforms its benchmark index consistently, it could indicate that the stock is overvalued or has fundamental issues that make it a risky investment.
It’s essential to keep in mind that relative performance is just one tool in a technical analyst’s toolbox. Informed investment decisions require the use of other tools and analysis techniques in conjunction with relative performance.
Related: Performance Indicator – Relative Strength
Go to the Relative Performance Charts slideshow and demo video
Advantages & Limitations of Relative Performance
When it comes to technical analysis, using Relative Performance can have both advantages and limitations. Here are some of them:
Advantages
- Identify outperforming securities: By comparing a security’s performance to a benchmark or another security, relative performance analysis can help investors identify securities that are outperforming the market or their peers.
- Gain a broader market perspective: Relative performance analysis allows investors to analyze a security’s performance within the context of the broader market or sector, providing a more complete picture.
- Facilitate trend identification: By comparing a security’s relative strength or weakness over time, relative performance analysis can help investors identify trends and potential turning points in price.
Limitations
- Benchmark selection: Selecting an appropriate benchmark for comparison can be challenging, and choosing the wrong one can lead to inaccurate conclusions.
- Historical data bias: Relative performance analysis heavily relies on historical data, which may be biased due to changes in market conditions or other factors.
- Not a standalone tool: Relative performance analysis is most effective when combined with other technical and fundamental analysis tools and should not be solely relied upon for investment decisions.
Remember, when using Relative Performance analysis, always choose the appropriate benchmark and use it in conjunction with other tools for a complete analysis of a security’s performance.
For traders, Relative Performance analysis is a valuable tool that offers a broader market perspective, helps identify outperforming securities, and facilitates trend identification, ultimately leading to better-informed trading decisions.
While relative performance analysis is a valuable tool for traders, it should not be used as a standalone method and must be combined with other technical and fundamental analysis techniques. Selecting the right benchmark for comparison can be challenging, and historical data bias can lead to incorrect conclusions. Therefore, traders must conduct comprehensive research and analysis before making any trading decisions.
