Relative Strength (Volatility Adjusted)

The Relative Strength (Volatility Adjusted) indicator provides a normalized comparison between a selected instrument and a benchmark index by incorporating volatility adjustments into its calculation. This tool aims to offer a more precise view of institutional activity and true relative performance by accounting for the inherent price fluctuations of each asset.

Usage

The indicator can be used to identify whether a stock is truly outperforming or underperforming the market, rather than just exhibiting higher nominal volatility.

• Relative Strength (RS > 0): When the RS line is above zero, the stock is showing relative strength against the benchmark. If the RS line is also above its Moving Average (MA), it indicates the strength is increasing.
• Weakening Strength (RS > 0, RS < MA): When the RS line is above zero but below its MA, the stock still possesses relative strength but is currently losing momentum.
• Relative Weakness (RS < 0): When the RS line is below zero, the stock is underperforming the benchmark. If the RS line is below its MA, the weakness is intensifying.
• Improving Weakness (RS < 0, RS > MA): When the RS line is below zero but above its MA, the stock is relatively weak but starting to regain some strength.

Details

Traditional Relative Strength (RS) calculations often compare the simple rate of change (ROC) between a stock and an index like the SPY. However, if a benchmark moves significantly and a stock follows with a larger move simply because it is naturally more volatile, a traditional RS calculation might incorrectly signal strength.

This script addresses this by normalizing price changes using the Average True Range (ATR). By dividing the price change of both the index and the asset by their respective ATRs, the indicator compares how many "units of volatility" each asset moved. If a stock moves 1 ATR while the index moves 2 ATRs, the stock is considered relatively weak, even if its absolute dollar move was larger.

Settings

• Comparison Instrument: The benchmark symbol to compare the current chart against (e.g., SPY, QQQ, BTC).
• Look-back Length: The number of bars used to calculate the cumulative relative strength.
• MA Length: The lookback period for the Moving Average applied to the RS line.
• Moving Average Type: Select between HMA (Hull Moving Average), SMA (Simple Moving Average), or EMA (Exponential Moving Average).
• ATR Length: The period used to calculate the Average True Range for volatility normalization.

FAQ

How do I interpret the zero line?

The zero line represents the neutral point where the volatility-adjusted performance of the asset matches the benchmark index.

What does the shaded area represent?

The background fill between the RS line and the Moving Average provides a visual cue for momentum; green indicates the RS is above the MA (improving/strong), while red indicates it is below (declining/weak).

How can I access this tool?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.