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RSC % is also devaince % by another name. It not only measures a stock's
Relative Strength against an index, but also measures the security's
deviance from it's comparable index/security, which is the same thing.
The same RSC methodology applies to stock vs index, sector index vs major
index, or security vs security - it's all measuring Relative Strength % or
deviance % from each other.
A highly correlated security pair will have very low RSC values, as they
both move very close to each other. As security A's RSC % moves away from
the zero line (i.e. security B), this deviation indicates positive/
negative strength or divergence from security B.
An example of this relative measurement between two highly correlated
securities would be the current Wheat (Kansas) 200705 contract against its
(currently more liquid) 200707 contract. There is currently only one
point difference between the two (0.2%) so there may not be an opportunity
there for a profit as the spread between the two contracts is minimal.
However, sometimes one can see major differences between similar
contracts, specially in Oil. RSC would point out these differences as
they occur, by showing an RSC or divergence value of 1% or greater.
Kevin, the same methodology applies to highly correlated stocks, even
though as you point out they may be in different sectors.
In a nutshell, RSC % and deviance % (divergence % between two securities)
are both the one and same.
jose '-)
http://www.metastocktools.com/URSC/URSC.htm
--- In equismetastock@xxxxxxxxxxxxxxx, Kevin Barry <kevin_barry@xxx>
wrote:
>
> Sorry, meant to add that these correlated securities may not even be in
> the same sector or indeed the same index. Some of the most promising
> pairs trading candidates can be in different markets and might even be
> different asset types.
>
> Regards,
> Kevin
>
>
> At 04:51 17/04/2007 -0700, you wrote:
>
> Not sure about that. Correct me if I'm wrong but isn't RSC concerned
> with identifying stocks or sectors outperforming (or underperforming)
> their respective sector or index? With a market neutral strategy, we are
> looking for securities that are highly correlated, i.e. moving in tandem
> with each other.
>
> Regards,
> Kevin
>
>
>
> At 01:50 17/04/2007 -0700, you wrote:
>
> In a nutshell, Relative Strength Comparison (RSC).
>
> jose '-)
> http://www.metastocktools.com/URSC/URSC.htm
>
>
>
>--- In equismetastock@xxxxxxxxxxxxxxx, Kevin Barry <kevin_barry@>
> wrote:
>
> Many thanks for your suggestion. Sorry that I didn't explain it very
> well.
> I am really looking to find a price derivative with which I can measure
> the price deviation between two securities. So, security A would be
> treated as a virtual straight line plot at zero with the plot of
> security B oscillating around it.
>
> Regards,
> Kevin
>
>
>
> At 10:37 14/04/2007 -0700, you wrote:
>
> (security("A",C)-security("B",C))/security("A")*100 {percentage plot}
>
> Not sure what you mean about plotting security A as a straight line.
>
>
>
> -----Original Message-----
> From: kevin_barry
> To: equismetastock@xxxxxxxxxxxxxxx
> Sent: Sat, 14 Apr 2007 6:37 AM
> Subject: Pairs Trading Perhaps Using The Security Function
>
> Hello,
>
> Could I pick your (collective) brains?
>
> Two securities can be compared using the Security function and then
> subtracting or dividing one plot from the other. The results in a
> trending plot.
>
> What I would like to achieve is to plot equity A as a straight line and
> then have the second plot displaying the difference between equity A and
> equity B. Ideally, this plot would indicate the percentage deviation
> rather than just the number of points difference.
>
> For those of you interested, the idea behind Pairs Trading is to
> identify two stocks that are closely correlated. When a divergence is
> detected, one would go long, say, equity A and short equity B in
> anticipation of the correlation being reestablished in the future. It is
> a market neutral strategy.
>
> Is this doable in Metastock?
>
> Regards,
> Kevin
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