Reviewed by Oct 05, 2020| Updated on
Relative strength is a calculation of the price trend of a stock or a financial instrument in comparison to another instrument, stock, or industry. It shall be determined by taking the price of one commodity and dividing it by another.
## Relative Strength Investing
Relative strength is a strategy used for determining value stocks and is used in momentum investing as well. It involves investing in stocks that have done well, in relation to their index or benchmark. For example, a relative strength investor might pick technology companies that have outperformed the Nasdaq Composite Index or large-cap stocks that are lagging against the S&P 500 index.
Technical analysts use the relative strength index ( RSI) to produce over-purchased or oversold signals.
In order to identify investment candidates, relative strength investors will start by evaluating a benchmark, such as the Nasdaq Composite Index. They would then look at which companies in that market that have outperformed their peers, either by growing faster than their peers or by dropping less rapidly than their peers.
As relative strength investment assumes that current patterns will continue in the future, it is most successful in stable periods with limited disruption.
Relative strength investment may also be used as a part of a broader strategy, such as pairs trading.
## What is the Relative Strength Index (RSI)?
Short-term and technical traders also monitor relative strengths. In the technical analysis, the Relative Strength Index ( RSI) is a momentum indicator that calculates the magnitude of recent price shifts to determine over-purchased or oversold conditions in the price of a stock or other commodity.
The RSI is shown as an oscillator (a line graph that travels between two extremes) and can be read from 0 to 100. The RSI reading of 30 or lesser highlights an oversold or undervalued situation.