Price Ratio (Relative Strength)

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Price Ratio (Relative Strength)

The Price Ratio (or relative strength - comparative) serves a similar purpose to Price Comparison - it compares the performance of one stock relative to another (or to an index). Some traders use the Price Ratio as a general tool to select outperforming stocks.

Price Ratio is calculated by dividing the closing price of the first stock by the second.

Unlike Price Comparison, Price Ratio is plotted in a separate indicator panel.

Example

Microsoft is charted with the Price Ratio to the Dow Jones Industrial Average,
Price Comparison to DJIA is shown on the price chart to illustrate:

The Price Ratio is positive when MSFT is above DJIA on the price chart.
The ratio is negative when MSFT falls below the DJIA.


Note how MSFT has under-performed relative to the Dow since March 2000.


msft%20price%20ratio.png


Construction

The Price Ratio is calculated using the ratio of closing price to that of another security, on the first day of the chart.
This means that the starting point of the Price Ratio will vary according to the Time Period selected. The line may appear to move if you change time periods; but the slope remains the same.

Tip: Settle on one or two standard time periods to be used when viewing Price Ratios (eg. 3 Years - Weekly; 6 Months - Daily).

The steps required to calculate the Price Ratio are best illustrated by an example: Calculate the Price Ratio of IBM to the Dow Jones Industrial Average (DJI) -

-Calculate the Inverse Ratio on Day 1: DJI divided by IBM.
-Divide IBM by DJI each day
-Then multiply step 2 by the Inverse Ratio in step 1
-The Price Ratio then reduces the start to zero by subtracting 1 (from step 3).