Speedometer of stocks.

There are two types of speedometers to gauge the momentum or speed of a stock: Relative Strength Index (RSI) and Comparative Relative Strength.

In very vague terms, RSI represents the speed of a stock, much like a car traveling at 40 km/h or 100 km/h. It provides information solely about the speed or momentum of stocks, without any additional context. We’ll delve into RSI in more detail another time. For now, let’s focus on understanding Comparative Relative Strength.

Comparative Relative Strength is like driving a car and comparing its speed to that of another car. Imagine you’re on the road, and you notice two cars side by side. You want to know which one is faster. So, you pay attention to how quickly each car is moving. That’s what Comparative Relative Strength does for stocks. It helps us compare their performance and see which one is gaining momentum faster. 🚗💨

So how does this concept help us in investing and trading.

The  main purpose of comparison is to determine who is performing better and who will reach their destination first.

In the context of investing and trading, this concept serves to determine which entity is performing better and who will achieve their goals sooner.

Imagine our stock as a car, and we’re comparing its performance to the speed of the Nifty Index. Why compare our stock to the Nifty? Well, historically, the Nifty has consistently delivered a steady return of 12-13% CAGR with minimal volatility (like avoiding accidents in cars). The Nifty Index is professionally managed and represents the top fifty companies in our country.

But why do we need comparison at all.

In India, the fixed deposit rate of SBI (India’s safest bank) is approximately 6.5%(Know More). However, considering the effective inflation rate of around 10%, this investment yields a negative return, especially after accounting for taxes. To seek better returns, we can explore Nifty ETFs or Gold ETFs, which historically offer a decent 10-13% return over the long term. These funds are passively managed by professionals, requiring minimal effort on our part. For those aiming for even higher returns in the stock market, diligent work becomes essential.  So will we look for opportunities only in stock whose speed is greater than that of Nifty. While high Relative Strength indicates potential opportunities, it doesn’t guarantee performance across all stocks. We’ll delve into various strategies and trading patterns based on these concepts in our future discussions.

The most essential factor that distinguishes professionals from beginners is they Always prioritize risk management and proper position sizing to ensure you stay on track towards your goals. While analysis is valuable, it’s important to acknowledge that it may not always yield the expected results. Be prepared to adapt if things don’t go as planned, and maintain a resilient mindset throughout your journey.