Stock Selection Using RS Ratio and RS Rating: A Technical Approach to Finding Market Leaders

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The RS Rating helps investors identify top-performing stocks with strong price growth potential, while the RS Ratio provides a comparative strength analysis, highlighting stronger securities relative to others.

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Stock Selection – Understanding Relative Strength or RS Rating – Identifying Market Leaders

What is RS Rating?

Relative Strength or RS Rating, is a technical analysis tool that ranks stocks based on their relative strength compared to the broader market. This rating helps traders and investors pinpoint stocks with strong momentum and potential for further price appreciation.

Key Features of RS Rating

1. Quantitative Measurement – RS Rating assigns a numerical value to a stock’s strength relative to the market.
2. Percentile Scale (1-99) – Assigns stocks a score from 1 to 99, with higher values indicating stronger relative performance. A higher rating (above 80) signals outperformance.
3. Market Comparison – Measures a stock’s performance against a benchmark index (e.g., NIFTY or NIFTY500).
4. Timeframe Consideration – Analyzes price movements over the past 12 months to smooth out short-term fluctuations.
5. Percentage Price Change – Evaluates price movement over various timeframes to assess momentum.
6. Momentum Indicator – A rising RS Rating signals strong demand, making it a useful metric for trend identification.
7. Investment Signals – Stocks with high RS Ratings are often market leaders, making them attractive investment opportunities.

Practical Uses of RS Rating

• Identifying Strong Stocks – Focus on stocks with RS Ratings above 80 for superior performance.
• Timing Entries and Exits – Buy stocks with rising RS Ratings in bull markets and avoid those with declining scores in bearish phases.
• Sector Rotation – Analyze RS Ratings at a sector level to allocate capital effectively.

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Stock Selection – Understanding RS Ratio – A Comparative Strength Analysis Tool

What is RS Ratio?

The Relative Strength (RS) Ratio measures the strength of one security relative to another. It is widely used to compare stocks, sectors, and asset classes to identify outperformers.

Key Features of RS Ratio

1. Comparative Strength Analysis – Evaluates performance of one security relative to another.
2. Versatility in Asset Comparison – Used for stocks, sectors, or asset classes.
3. Benchmarking Against a Standard – Measures performance relative to an index, sector, or another stock.
4. Ratio Calculation – Expressed as Security A / Security B, where values above 1 indicate outperformance.
5. Trend Identification – A rising RS Ratio suggests strengthening momentum.
6. Momentum Insights – Helps align strategies with strong-performing assets.
7. Tactical Allocation – Assists in deciding sector and stock weightage.
8. Trend Reversal Signals – A declining RS Ratio may indicate a shift in market trends.
9. Customizable Timeframes – Adaptable for both short-term and long-term analysis.

Practical Uses of RS Ratio

• Sector Rotation – Identify sectors outperforming the broader market for better allocation.
• Portfolio Optimization – Allocate capital based on RS Ratio trends to enhance returns.
• Trend Reversals – A declining RS Ratio may indicate weakening strength, signaling a potential exit point.

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Also see:
1. RS Rating or Relative Strength Rating (an aid for stock selection in ChartAlert)
2. Relative Rotational Charts (an aid for sectoral rotation and stock selection)
3. RS Matrix or Relative Strength Matrix (an aid for sectoral rotation and stock selection)
4. Stock selection using RS Matrix

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Running the RS Matrix in ChartAlert

ChartAlert simplifies RS Ratio and RS Rating analysis through the RS Matrix tool. Here’s how to use it:

1. Navigate to Tools > P&F Relative Strength Matrix or press CTRL+R.
2. Select stock groups such as indices, sectoral indices, or custom watchlists.
3. Choose a scan date and customize P&F parameters (e.g., 2% RS charts for sector and stock comparisons).
4. Run the RS Matrix to identify outperforming stocks and sectors.
5. Save and reuse matrices for streamlined analysis.

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Applying RS Matrix to Stocks Shortlisted by RS Rating and RRC Rank

Use the RS Matrix on a custom watchlist that includes:

• Stocks in the Leaders Quadrant – Strong RS Ratio and momentum.
• Stocks with high RS Ratings – Outperforming 80% of peers.

Iteration #1 – Filtering by RS Rating

1. Sort scan results by RS Rating (descending order).
2. Select stocks above the 80th percentile.
3. Add chosen stocks to a new WatchList (e.g., RRCRank+RSRating).

Note: As RS Ratings are limited to the 750 stocks in the NIFTYTOTAL Index, we’ll restrict ourselves to examining the components of this Index.

Iteration #2 – Filtering by RRC Rank

1. Sort scan results by RRCRank (ascending order).
2. Select top 50 stocks from quadrant 2 (leaders) or quadrant 3 (outperforming but losing momentum).
3. Add them to the existing WatchList.

Applying RS Matrix to WatchList

Run the RS Matrix on this refined WatchList to identify the strongest performers in the market.

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Background Note on RRC Rank and RS Rating

• RRC Rank – Based on RS Ratio (benchmark outperformance) and RS Momentum (strength of trend).
• RS Ratio – Evaluates medium-term trends, prioritizing recent data like an exponential moving average.
• RS Rating – Measures one-year trends, assigning greater weight to recent performance.
• Custom Indices – Helps track underrepresented sectors and industries for better market analysis.

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Custom Indices for Better Market Representation

Standard sectoral indices may not provide a complete market picture. Custom indices can be created in ChartAlert (for example) to track nearly 1200 stocks, covering:

• 750 NIFTYTOTAL index stocks (LargeCap, MidCap, SmallCap, MicroCap).
• 700+ BSE Group A stocks.
• 900+ BSE SmallCap index stocks.

Using custom indices ensures a broader view of sectoral and industry group trends, leading to more accurate investment decisions.

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Optimize Your Stock Selection with ChartAlert

Take Your Trading to the Next Level. ChartAlert makes it easy to leverage RS Ratio, RS Rating, RS Matrix, and custom indices for smarter stock selection. Sign up for a paid 4-week evaluation trial and discover how our powerful tools can enhance your trading strategy.

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