Relative Strength – Alpha

• Period: 50
• MA Period: 20

When you select the Relative Strength Alpha indicator, two lines are displayed on the chart.

1. Green line represents the Relative Strength Alpha indicator
2. The red line represents the Moving Average of the Relative Strength indicator

The Relative Strength indicator is a component of the relative strength analysis of a market.

The Relative Strength indicator is calculated differently from the ratio chart, but the behaviour is almost identical. A RS indicator is calculated by dividing the price of the numerator stock by the price of the denominator stock over the chosen look-back period, rather than dividing the price of the denominator stock by the price of the numerator stock. The Relative Strength indicator is computed by subtracting the returns of the numerator from the returns of the denominator.

Calculated so that it will be above zero if the numerator outperforms the denominator, and below zero if the numerator underperforms the denominator.

Crossover of the zero line indicates that the returns of the numerator have crossed those of the denominator. If you examine the logic of the indicator, you will discover that it is based on a calculation of Alpha. Alpha is calculated by subtracting the total return of the stock from the benchmark. Hence, I call the above indicator Relative Strength–Alpha.

In order to use this indicator effectively, it is important to choose a look-back period. The number of bars on the chart can be adjusted, as well as the dates of significant events.

The RS-Alpha indicator above its zero line and above its average line indicates that the stock is bullish and outperforming its benchmark. A reading of the RS-Alpha indicator below the zero line and below its average line indicates that the stock is bearish and it is underperforming the benchmark.

You can scan the RS indicator readings for various instruments by selecting the RS indicator scanner from the RS scanner menu on TradePoint & RZone. By doing so, you will be able to compare the readings of all stocks based on the trend and the reading of the relative strength alpha indicator.

Prashant Shah introduced this pattern in his book on Relative Strength analysis. This book is available for free on Shelf.

Click here to learn more about this indicator.