• : February 21, 2021
  • : Prashant Shah

Ratio Trend Patterns

During my earlier days in the markets, I practiced screen reading a lot. I was still learning about chart analysis but there was something on screen that would suggest about strength or weakness of a particular stock. It must be due to activity, momentum, volume or strength / weakness that a stock showing at a particular price level etc. It is difficult to define but it must be a combination of all these.

We have discussed many times about Ratio charts and Relative strength analysis. I guess many people practice it even when they are not looking at charts. It’s difficult to define.

Let’s discuss Relative strength as a tool even without plotting the charts.

A Ratio is calculated by dividing the price of one instrument by another. It helps us defining how a particular instrument is behaving during different market situations.

Let’s try to define what do we mean when we say stock is showing strength:

  • Stock shows strong momentum when market is bullish
  • Stock is going up or not falling even when market is not bullish We call it outperformance. Vice versa for underperformance
So, what are the possibilities of stocks behaving when Index price is falling:
  • Stock moves down along with index
  • Stock goes up
  • Stock falls less than in the index
Let’s name these patterns:
  • Stock falls more than the index: This is bearish. Let’s call it “Bearish – Continuation”
  • Stock goes up: This is very bullish RS pattern. Let’s call it “Bullish RS Divergence”
  • Stock falls but less than the index: This is interesting. Let’s call is “Sign of strength”
When market is rising:
  • Stock goes up more than the index: “Bullish – Continuation”
  • Stock moves down: “Bearish Divergence”
  • Stock moves up but less than the index: “Sign of weakness”

A Ratio of stock to index can tell us how stock behaved compared to index. Higher the ratio better the performance.
You can fine these RS patterns in TradePoint. Go to Table -> Relative Strength Report.

Select group, select denominator in Scrip 2 and timeframe.

The data in columns show:

Scrip: Scrip  name LCP: Last closing price

Nifty 50 Trend: Trend of denominator (Up or Down) Commentary: Comment on Ratio pattern

Ratio performance: Strength of Ratio

RS Trend: Ration Trend pattern that we discussed above The Commentary section is self-explanatory.

We can sort the Trend column and find stocks showing the strength for the week or month.

We can select sector index as denominator instead of Nifty as well. Above table can be see on intraday timeframe as well.
Let’s take this further.

Using above tool, we get to know about ratio pattern on the last bar. Knowing how price has performed over last several bars can be very useful.

If ratio pattern is more bullish over last few sessions, it shows us bullish behavior of the stock. We can achieve this by scoring the above ratio patterns:

  • Bullish continuation: Score 2
  • Bullish RS Divergence: Score 3
  • Sign of Strength: Score 1
  • Bearish continuation: Score -2
  • Bearish RS Divergence: Score -3
  • Sign of Weakness: Score -1

Divergence is scored more because that could be an early sign of reversal and exhibits strength. You can check the score for last few bars in TradePoint. Go to Matrix -> Ratio Trend Matrix.

Select Group, Denominator, timeframe and number of bars.

The method of scoring helps us here. Total column shows the total of score for the selected period. We can sort that column and find the stocks showing strength or weakness based on Ratio pattern.

It’s a fascinating tool and takes into account all possible combination related to Relative strength and price analysis.

On screen, I used to look for stocks showing the strength when market is rising and not falling much when market is correcting. Former is, Bullish continuation pattern and later is RS Divergence of Sign of strength. A stock would show positive total score where this kind of pattern exists over last few bars. Above tool is an attempt to make the reading objective.

Couple of rules for Trading using above tool:

Steps to follow for momentum picks:
  • Run Ratio Trend Matrix over last 5 Weeks and look for stocks showing positive score for bullish picks and stocks showing negative score for bearish picks.
  • Look for stocks showing Bullish RS Divergence or Sign of Strength on last bar when its total score is positive.
  • Perform chart analysis to find trade able pattern.

Steps for BTST – STBT type trades:
  • Run Ratio Trend Matrix for F&O Market. Select denominator as NIFTY-I.
  • Select Number of bars 15 and time frame as 15 mins.
  • Look for bullish patterns in stocks in top bullish total score and bearish patterns in stocks in top bearish total score.

Think.. what are we trying to read over last 15 bars over 15 min timeframe. If it makes sense, explore this concept further. You can experiment with period and timeframe that I have suggested.