Understanding Relative Rotation Graphs (RRG)

In the dynamic world of investing, visual tools can provide deep insights into market trends and stock performances. One such tool is the Relative Rotation Graph (RRG). In this article, we'll explore what RRGs are, how they're calculated, and how to interpret them, with a focus on an RRG plot I created.

What is an RRG?

A Relative Rotation Graph (RRG) is a visual tool that displays the relative strength and momentum of multiple securities against a common benchmark. The RRG divides the graph into four quadrants:

1. Leading: Securities in this quadrant show strong relative strength and momentum.
2. Weakening: Securities here still have strong relative strength but their momentum is weakening.
3. Lagging: These securities have weak relative strength and momentum.
4. Improving: Securities in this quadrant have weak relative strength but their momentum is improving.

Calculation Basics

The RRG plot is calculated using two main components:

1. Relative Strength Ratio (RS-Ratio): This is calculated by dividing the price of a security by the price of the benchmark index. The RS-Ratio helps in identifying the strength of the security relative to the benchmark.
2. Relative Strength Momentum (RS-Momentum): This is the rate of change of the RS-Ratio over a specific period. It helps in identifying the momentum of the security relative to the benchmark.

Both these metrics are normalized and plotted on a scatter plot, dividing the chart into the four aforementioned quadrants.

Interpreting the RRG Plot

Here is an example of an RRG plot for some Indian Sectors compared to the Nifty 50 index:

In this chart:

• X-axis represents the RS-Ratio.
• Y-axis represents the RS-Momentum.

The quadrants are color-coded for better interpretation:

• Green (Leading): Stocks like CNXFMCG and CNXIT are performing well both in terms of relative strength and momentum.
• Yellow (Weakening): Securities here are losing momentum but still have strong relative strength.
• Red (Lagging): Stocks such as CNXMEDIA are underperforming both in strength and momentum.
• Blue (Improving): Stocks like GOLD BEES.NS and CNXREALTY are gaining momentum and might soon shift to the leading quadrant.

Key Insights from the RRG Plot

1. Leading Stocks: CNXFMCG and CNXIT show robust performance, making them potential candidates for further investment consideration.
2. Improving Stocks: GOLD BEES.NS and CNXREALTY are on a positive momentum trend, indicating potential future leaders.
3. Lagging Stocks: CNXMEDIA is underperforming and might not be the best investment option at this moment.

Conclusion

RRG plots are a powerful tool for visualizing the relative performance of multiple securities against a benchmark. By understanding the relative strength and momentum, investors can make informed decisions about their portfolios. This RRG plot provides a snapshot of the current performance of some key Indian sectors, offering valuable insights into potential investment opportunities.

Register for the webinar if you interested to know how to plot RRG chart using Python

Link for Registration