In this series on Relative Strength, we have explored its significance as a valuable tool for gaining an edge in trading. We discussed the concepts of outperformance and underperformance and learned how to analyze the nature of these using the principles of Numerator and Denominator. Additionally, we examined various patterns of Relative Strength. The patterns discussed in the previous newsletters are the most important element of Relative strength and the tools we learn in the coming newsletters.

In today's newsletter, we dive into the first tool of this mini-series—the Ratio Trend Matrix. This tool provides traders with insights into the trends of Ratio charts and the patterns they formed in previous sessions. We'll start by exploring how this tool functions and then discuss how to use it effectively.

Ratio Trend Matrix

We previously understood the Relative strength patterns - Flying, Lion, Bullish star, Drowning, Cat, and Bearish star. The former 3 being patterns of outperformance (bullish in nature) and the latter 3 being patterns of underperformance (bearish in nature).

Focusing solely on the latest pattern formed on the Ratio chart often leads to an incomplete analysis of relative strength. Instead of analyzing just the most recent pattern, it's more effective to examine the overall trend of these patterns. Relying only on the latest pattern can be misleading, as the instrument might simply be in a pullback phase. Also, this tool can be used to analyze the stocks in a group of stocks.

This is where the Ratio Trend Matrix proves invaluable. This tool provides a comprehensive view of an instrument's relative strength trend, on a particular timeframe, over a predefined number of sessions. By highlighting the broader trend, it offers clarity and helps filter out the noise caused by temporary pullbacks.

This tool utilizes candlestick charts to analyze the performance of the numerator relative to the denominator, highlighting the resulting patterns each session.

This tool is available on the RZone platform by Definedge securities. Below is an example of the Ratio Trend Matrix. The timeframe used is Daily and the number of predefined sessions set is 20 (as there are 20 trading sessions in a month). The denominator used is Nifty 50 index and the group of stocks used are from Nifty 100 index.

Bar0, Bar1, Bar2, and so on represent the number of candlestick bars counted from today. The tool identifies the pattern formed during each session, enabling us to analyze the trend. It assigns a score of 1 to each session where the stock exhibits a pattern of outperformance. The cumulative score is displayed in the "Total" column. For instance, if the Total score is 7, it means that out of 20 sessions, the stock demonstrated a pattern of outperformance in 7 sessions.

How to use the Ratio Trend Matrix

To use this tool effectively, stocks showing strength can be saved as a group. But what defines "strength"? Ideally, a stock should have a total score exceeding 50% of the predefined sessions. For example, if the predefined sessions are 20, stocks with a total score of 10 or higher would qualify as strong and be saved.

Look at the picture below. DABUR shows a Total score of 15. This means that the stock formed patterns of outperformance in 15 sessions out of 20 sessions. This shows that the trend of Relative strength was strong. DABUR was followed by other stocks that had a Total score of more than 10. These could be saved as a group and used as a watchlist. These can then be traded as per the trade setup preferred by the trader.

This tool can be used for various timeframes like Weekly, Monthly etc. as well depending upon the trading style.

In this newsletter we discussed about one of the Relative strength tools at disposal of the trader. In the coming newsletters, we will discuss how to analyze the ratio chart further and the various charting methods that can be used for plotting Relative strength.

The Ratio Trend Matrix is a valuable tool for assessing the trend of relative strength. However, effectively utilizing it requires a thorough understanding of chart patterns and price analysis to make informed trade decisions. Mastering the nuances of various charting methods, selecting the right indicators, and analyzing them is an in-depth process that can be learned and refined over time. To dive deeper into these concepts, consider exploring the exclusive TNT One membership.

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