Relative Strength Comparative (RSC) – Strategy, Rules, Settings, Returns
Trading and investing smart means using the right tools to choose the right stocks to trade or invest in — one tool that helps you find high-momentum stocks is the Relative Strength Comparative (RSC) indicator. What do you know about this tool?
Primarily used for screening stocks, the Relative Strength Comparative (RSC) is a technical analysis tool that compares the performance of a tradable asset, such as a stock, with that of the benchmark market index. Its value is obtained by dividing the chosen price performance of the stock by the price performance of the specified benchmark index over a specified period.
In this post, we will take a look at most of the questions you may have about the Relative Strength Comparative (RSC) indicator: what it is, how it works, and how you can improve your trading strategies with it. Keep reading!
Key takeaways
- Purpose of the Relative Strength Comparative (RSC): Used for screening stocks by comparing their performance against a benchmark market index.
- Calculation: RSC is calculated by dividing the stock’s price performance by the price performance of the benchmark index over a set period.
- Comparison Across Stocks: RSC values allow for comparing different stocks’ performance relative to the broader market.
- Application in Stock Screening: Helps identify momentum stocks, making it useful for both trading and long-term investments.
- Use in Momentum Investing & Asset Rotation: Assists in selecting stocks or assets that outperform the market or sector benchmarks, such as an energy stock outperforming the energy sector index.
- QuantifiedStrategies.com backtests a Relative Strenth Comparative trading strategy
- More indicators are available if you click here: best trading indicators.
What is Relative Strength Comparative (RSC)?
Primarily used for screening stocks, the Relative Strength Comparative (RSC) is a sentiment analysis tool that compares the performance of a tradable asset, such as a stock, with that of the benchmark market index. Its value is obtained by dividing the price performance of the chosen stock by the price performance of the specified benchmark index over a specified period.
Since the RSC values of different stocks can be obtained and compared, the tool not only helps determine whether a stock has outperformed or underperformed the broader market but also offers a simple yet significant way to gauge the performance of one stock vs. another. This is why it is such a powerful stock screening for identifying momentum stocks for trading or possible long-term investments.
The tool is used in momentum investing and asset rotation where it helps in choosing stocks or other assets that have performed well relative to the whole market or a certain sector benchmark. For instance, you can choose an energy stock that is outperforming the energy sector index or the S&P 500 index.
Relative Strength Comparative (RSC) trading strategy – rules, settings, and returns
Let’s backtest a trading strategy that has the following trading rules:
THIS SECTION IS FOR MEMBERS ONLY. _________________ BECOME A MEBER TO GET ACCESS TO TRADING RULES IN ALL ARTICLES
We examine the relationship between HYG (high yield) and TLT (“safe” US long-term Treasuries).
(Please look at the code below if you are unsure of the trading rules.)
This is the equity curve for HYG from its inception until today, including 0.03% commissions for each trade (0.06% for a round trip):
Trading performance metrics and statistics from inception until today (including 0.03% commissions per trade):
- Number of trades: 174
- Average gain per trade: -0.17%
- Annual returns: -0.4%
- Win rate: 57%
- Time spent in the market: 3
- Risk-adjusted return: -11.9%
- Max drawdown: 10%
As you can see, this is not a good strategy. As a matter of fact, backtests reveal that the Relative Strength Comparative is a very tricky indicator to make money, be it stocks or bonds.
This is the code we used for the backtest (Amibroker):
THIS SECTION IS FOR MEMBERS ONLY. _________________ BECOME A MEBER TO GET ACCESS TO TRADING RULES IN ALL ARTICLES
Why is RSC important for traders?
The RSC is important for traders because it offers an easy way to gauge the performance of a stock against a sector index, the broad market index, or even another stock. Traders use it to screen stocks to choose the one to trade. It is especially useful for momentum traders and investors who can use it to choose the stocks to trade or invest, as well as rotate from one stock or sector to another.
For instance, a trader can use it to select the best-performing stocks in a sector with high momentum. After a while, say one to three months, they will use it to screen stocks again to find and rotate into the new high fliers while rotating out of positions where the stock’s momentum has died down. It is a very important tool for both active short-term traders and long-term investors.
How does RSC help in comparing stocks?
How the RSC helps in comparing stocks is really significant. Let’s say you’re a momentum investor who wants to invest in the stock market and you’re considering three companies within the same sector. With all three stocks looking promising, you can use the RSC to know the stock with the best performance in recent times.
In this case, you calculate the RSC value of the two stocks and compare them. Let’s say the value for stock A is 1.51, that of stock B is 0.57, and that of stock C is 1.23. From the RSC values, you can see that stocks A and C are outperforming the sector index, while stock B is underperforming the index.
So, stocks A and C are worth considering further. When you compare their RSC values, it becomes obvious that stock A is the winner. It has a higher RSC value than stock C, which means that it has more momentum. Just based on this RSC analysis alone, as a momentum trader, you will choose stock A.
How does the RSC differ from the Relative Strength Index (RSI)?
The RSC differs from the Relative Strength Index (RSI) in that it compares the performance of a tradable security, such as a stock, with that of the benchmark index, while the RSI is an oscillator that measures the relative strength of an instrument by checking the ratio of up days vs down days for the instrument.
Stock traders use the RSC to screen stocks and select the best-performing stocks. It is not an indicator for creating entry or exit strategies. The RSI, on the other hand, is frequently used by traders for analyzing the momentum of price swings for entry setups. In other words, the RSC is a sentiment analysis tool, while the RSI is a technical analysis tool.
How is RSC calculated?
The RSC is calculated using this formula:
RSC = {%Price Performance of a Stock} / {%Price Performance of the Benchmark Index}
Where:
- %Price Performance of a Stock is the % move in the stock over a specified time
- %Price Performance of the Benchmark Index is the % move in the index over the given time
As you can see, the equation gives a numeric value, which shows how the stock has performed compared to the broader market represented by the benchmark index. A value of more than 1 shows that the stock has performed better than the benchmark index, and a value of less than 1 shows that the stock has underperformed. A value of 1 implies that the stock has performed as well as the index.
What data is needed to calculate RSC?
The data needed to calculate RSC are the price data of the stock being measured and that of the benchmark index over the chosen period. The actual data used is the percentage price performance, which is obtained as follows:
%Price Performance = 100 x (Current price — Price at n-period ago) / Price at n-period ago
This is calculated for both the stock and the benchmark index to get the data for calculating the RSC for the stock. Note that the period must be the same for the stock and the index.
How can RSC indicate market trends?
The RSC does not directly indicate market trends. Instead, it compares the performance of a security against that of the benchmark index. The benchmark index can be a sector index, such as the SPX energy sector index, or a broad market index, like the S&P 500 index.
It provides a numerical value that can show you whether a stock has performed better than the index, less than the index, or the same as the index. You can also compare the RSC values of different stocks in the same sector or market to find the ones with higher momentum in recent times.
How does RSC highlight outperforming stocks?
The RSC highlights outperforming stocks by showing different stocks’ performances relative to the benchmark index. Stocks with better performance compared to the benchmark index will have RSC scores greater than 1, while stocks with poor performances will have RSC scores less than 1. The higher the RSC score, the better the performance, and also the lower the score, the poorer the performance.
So, outperforming scores will have RSC scores greater than 1. If you’re comparing the performance of different stocks that already have RSC scores greater than 1, the ones with higher RSC scores are outperforming the others.
Can RSC identify underperforming stocks?
Yes, RSC can identify underperforming stocks, as it compares the stocks’ performances to that of the benchmark index. When the RSC value is less than 1, it means that the stocks underperform the benchmark index. So, the RSC can identify underperforming stocks by showing that their RSC values are less than 1.
Among stocks with less than 1 RSC value, the lower the value, the worse the performance. The least-performing stock is the one with the lowest RSC value.
How can RSC help with stock selection?
The RSC can help with stock selection by showing how well different stocks are performing relative to the benchmark index. Since the indicator gives a numerical value, the RSC value of different stocks can be compared to find and select the ones with the best performance (highest RSC value).
For instance, say Jim is analyzing five stocks. Being a momentum trader, he wants to select two stocks with the best momentum. He can use the RSC to do that. Assuming the five stocks have RSC values as follows:
Stock | RSC value |
A | 0.75 |
B | 1.34 |
C | 1.42 |
D | 1.00 |
E | 1.15 |
From the table above, Jim would select Stock C and Stock B, in that order. Those have the highest RSC values, which means they have the best momentum in recent times.
What time periods are best for RSC analysis?
The time periods that are best for RSC analysis will depend on the trader’s trading style, which will determine how much recent momentum is considered. A short-term trader may use a 21-trading-day period, which is the same as a month, while a long-term investor may use a full year (about 250 trading days).
Medium-term traders may use three months or six months. This would mean comparing the percentage performance over a month, three months, or one year, as the case may be.
How does RSC work with technical analysis?
How RSC works with technical analysis will depend on what the trader wants to achieve and their trading strategy. By and large, the RSC is used to select the stocks with the best momentum to trade, while other forms of technical analysis are used to time an entry in a specific stock.
For instance, an active short-term momentum trader may use a one-month RSC analysis to identify the best momentum stock in the tech sector and then use price action analysis or momentum oscillators to find an entry setup.
Can RSC be used with other indicators?
Yes, the RSC can be used with other indicators to find the right moment to enter a trade in the right stock. The RSC only tells you the stocks that are outperforming or underperforming the benchmark index. You use that information to select the best stocks to trade.
Then, you have to use other indicators to create your entry and exit strategy. Some of the indicators you can use are momentum oscillators like the RSI, stochastic, and Williams %R, as well as volume indicators like the Twiggs Money Flow.
What does a rising RSC value mean?
A rising RSC value means that the stock’s momentum is increasingly rising relative to the benchmark index. This could be a result of rising momentum in the stock itself or falling momentum in the benchmark index. Whatever the case, the stock is getting stronger than the benchmark index in recent times, which is a good thing.
Such a stock tends to perform very well in bull markets, and in a bear market, they tend to be the best defensive stock.
What does a falling RSC value indicate?
A falling RSC value indicates that a stock’s momentum is falling relative to the benchmark index. This could be a result of falling momentum in the stock itself (the stock is in its own bear market) or rising momentum in the benchmark index.
Whatever the case, the stock is continually getting weaker than the benchmark index, which is not a good thing. Such a stock tends to perform poorly in general bull markets, and in a bear market, they tend to take a nosedive.
How can traders use RSC in bull markets?
In bull markets, traders use the RSC to select the stocks with the highest momentum for trading. High-momentum stocks tend to outperform the rest of the market during bull markets, which is why traders try to seek them out using the RSC.
It is not enough for a stock to have an RSC value of more than 1. Traders select the ones with the highest RSC values among those that have values greater than 1 — the best of the outperformers.
How can RSC be used during bear markets?
In bear markets, traders can use the RSC to rotate into highly defensive stocks. Defensive stocks are stocks that outperform the rest of the market during bear markets. Examples are market leaders in the utility and healthcare sectors.
During bear markets, those stocks tend to have high RSC values because they are either gaining or staying steady when the rest of the market is losing, or losing less when others are losing heavily.
Is RSC useful for long-term investors?
Whether the RSC is useful for long-term investors or not depends on the timeframe of the analysis. Of course, an RSC analysis done with monthly percentage performance may not be useful to long-term investors. However, an RSC analysis done with yearly or bi-yearly performance would certainly be useful to long-term investors.
So, it is a question of the timeframe of the analysis, and every investor/trader should use the timeframe that suits their trading/investing style.
How can beginners interpret RSC charts?
To interpret RSC charts, beginners must first learn what the indicator means, how it works, and how its values are derived. With that, they will understand when a stock is outperforming the market index or underperforming an index, and the significance of each situation.
Coming to the basics, values above 1 indicate outperformance, while values less than 1 indicate underperformance. The higher the RSC value, the better the stock, especially if the value is greater than 1.
Can RSC be applied to sectors or industries?
Yes, RSC can be applied to sectors or industries to assess their performance relative to the broad market index. In this case, the percentage performance of an industry index or a sector index is compared against the performance of the broad market index over the same period.
For example, the percentage performance of the energy sector index (XLE) over the last three months can be compared to that of the S&P 500 index (SPY) over the same period. The same can be done for other sector indexes. The sector index with the highest RSC value would be the best performer.
How can RSC improve your trading strategy?
The RSC can improve your trading strategy by helping you select the best-performing stocks to trade. Stock selection is the first step in creating a winning trading strategy. If you don’t select the right stocks, you may not realize the potential of your trading strategy. This is why you have to get your stock selection method right. RSC is one of the best tools for stock selection — it will not only show you the stocks that are performing better than the benchmark index but also showcase the best performers among all.
What are common mistakes when using RSC?
The common mistakes when using RSC include:
- Using the indicator as a market timing tool to find entry and exit setups
- Using it as a standalone trading strategy instead of combining it with other forms of analysis to find the right trade setups
- Getting into the market without a trading strategy and plan
- Not having a robust risk management strategy
How does RSC compare to moving averages?
Compared to moving averages, the RSC is a comparative tool for selecting the best-performing stocks or securities for trading. While moving averages are technical indicators for identifying trends and formulating entry rules, the RSC is more of a sentiment analysis tool to assess the momentum of individual stocks relative to the sector or broad market index.
In other words, you can use the RSC to find the right momentum stocks to trade, whereas you can use moving averages to find trade setups and time the market.
Can RSC be automated in trading systems?
Yes, RSC can be automated in trading systems for stock screening and selection. Many trading platforms that offer stock screening services use the RSC or similar tools to assess several stocks and pick out the ones that fit the required screening criteria.
In combination with the right trading strategy, the RSC can be used in an automated trading system that selects the qualifying stocks and executes trades when the right trading setups form.
How do you set up RSC on trading platforms?
To set up RSC on trading platforms, you go to the indicator section of the platform to check whether the RSC is already preinstalled. Most modern trading platforms have the RSC as a part of their stock screening tool. You can also create a custom indicator to suit your specific needs.