RK.RRG

What is a Relative Rotation Graph?

An RRG chart is a visual tool that plots securities (stocks, sectors, or indices) based on two key metrics:

Relative Strength (RS) Ratio: This measures how a security performs compared to a benchmark (e.g., Nifty 50 or Bank NIfty).
Relative Momentum: This measures the rate of change of the relative strength, indicating whether the security is gaining or losing momentum relative to the benchmark.
Relative Rotation Graph

The RRG chart is divided into four quadrants, each representing a phase in the rotation cycle:

In the image above, Bank Nifty has been used as the benchmark index, and select constituent stocks were carefully chosen to compare relative strength and momentum.

Leading (Top-Right): Securities with high relative strength and high momentum. These are outperformers, often in a strong uptrend.

Example: CANBK, FEDERALBNK, AXISBNK, and ICICI BANK are in the Leading quadrant.
Weakening (bottom-Right): Securities with high relative strength but declining momentum. Securities in the Weakening quadrant show signs of weakening strength, which may precede a decline in performance.

Example: IDFCFIRST and AUBNK are in the weakening quadrant.
Lagging (Bottom-Left): Securities with low relative strength and low momentum. These are underperformers, often in a downtrend.

Example: KOTAKBNK and BANKBARODA are in the lagging quadrant.
Improving (Top-Left): Securities with low relative strength but increasing momentum. These may be starting to turn around and could be potential opportunities.

Example: PNB, SBIN and HDFCBNK are in the improving quadrant.
The center of the graph represents the benchmark (e.g., BankNifty, Nifty 50). Securities farther from the center are stronger or weaker relative to the benchmark, and their movement through the quadrants shows their rotational behaviour over time.

How is RRG calculated?

To understand RRGs, let’s break down the calculations behind the two axes of the graph: Relative Strength Ratio and Relative Momentum.

1. Relative Strength (RS) ratio

The RS Ratio compares the price performance of a security to that of a benchmark index. It is calculated as follows:

RS Ratio = Price of Security/Price of Benchmark

Example: If the price of a stock (e.g., Reliance Industries) is ₹1450 and the Nifty 50 index is at 25000, the RS Ratio is:

RS Ratio = 1450 / 25000 = 0.058
A rising RS Ratio indicates the security is outperforming the benchmark, while a falling RS Ratio indicates underperformance.
2. Relative Momentum

The Relative Momentum measures the rate of change of the RS Ratio over a specified period (typically weekly or daily). This is done using the Jdk RS-Momentum, which normalizes the RS Ratio to make it comparable across securities.

Relative Momentum

The RS Ratio is plotted over time (e.g., 12 weeks), and the momentum is calculated as the normalized rate of change.
A value above 100 indicates positive momentum (gaining strength), while a value below 100 indicates negative momentum (losing strength).