Relative Rotation Graph (RRG) by SR7

14 Okt

Relative Rotation Graph (RRG) charts show you the relative strength and momentum of a sector or group of stocks against a benchmark like Nifty50.

• Stocks with strong relative strength and momentum appear in the Green Leading quadrant.
  
• As relative momentum fades, they typically move into the Yellow Weakening quadrant.
  
• If relative strength fades, they move into the Red Lagging quadrant.
  
• Finally, when momentum starts to pick up again, they shift into the Blue Improving quadrant.
  

Understanding the Parts of the Relative Rotation Graph (RRG)

• Axes: The x-axis or RS-Momentum line is the relative strength ratio. This axis measures the performance of a security relative to a benchmark (hence, the strength is “relative”). A value more than 100 indicates outperformance, while a value less than 100 indicates underperformance. The y-axis or RS-Ratio line represents the momentum of the relative strength. This axis shows the rate of change in the relative performance. It is essentially the momentum of the relative strength ratio.
  
• Top right (Green) quadrant: The top right quadrant in the RRG is the leading quadrant. Securities in this quadrant are outperforming the benchmark, and their momentum is positive. This indicates strong and improving performance.
  
• Bottom right (Yellow) quadrant: The bottom right quadrant is the weakening quadrant. Here, securities are still outperforming the benchmark, but their momentum is decreasing. Being here suggests that while they are strong, they might be losing their edge.
  
• Bottom left (Red) quadrant: This is the lagging quadrant. Securities in this area are underperforming the benchmark with negative momentum. It is a sign of weakness.
  
• Top left (Blue) quadrant: This is the improving quadrant. This quadrant contains securities that are underperforming the benchmark but show increasing momentum. Being here suggests the potential for a turnaround.
  
• Data points and movement: Each security or asset is represented as a data point on the graph. The position of a data point within the graph indicates its relative strength and momentum. The movement of these data points is tracked over time, usually in a clockwise direction through the quadrants, which illustrates the evolution of their relative performance.
  

RRGs help investors spot trends and compare several securities at once. However, RRGs should be used with other forms of analysis since they provide a relative, not absolute, view.