top of page
  • Writer's picturePeet Serfontein

Understanding Relative Rotational Graph (RRG) in Share Trading

Introduction

In the world of equity market analysis, traders and investors often seek to identify promising investment opportunities by evaluating the performance of various shares. One valuable tool that aids in this analysis is the Relative Rotational Graph (RRG). RRG is a graphical representation that helps investors understand the relative strength and momentum of different shares within a given market or sector.


What is a Relative Rotational Graph (RRG)?

A Relative Rotational Graph is a visual representation of the relative performance of shares in comparison to a benchmark index or a specific group of shares. The graph plots individual shares as data points and illustrates their movement over time, relative to the benchmark. The positioning of each share on the graph provides crucial insights into its relative strength, momentum, and potential investment opportunities.


How RRG Works: The Four Quadrants

The RRG chart is divided into four quadrants, each representing different stages of relative performance:

  1. Leading (Leading Quadrant): Shares in this quadrant are exhibiting strong relative strength and positive momentum compared to the benchmark. They are outperforming the broader market or sector and are considered leaders in terms of price performance. These shares are regarded as potential Profit takes or Holds candidates.

  2. Weakening (Weakening Quadrant): Shares in this quadrant are experiencing a decline in relative strength compared to the benchmark. While they might still be in an uptrend, their momentum is slowing down, and they may be losing some of their leadership positions. These shares are classified as potential Deteriorating candidates or short-selling.

  3. Lagging (Lagging Quadrant): Shares in this quadrant are underperforming the benchmark. They are experiencing weak relative strength and may be struggling compared to other shares or the broader market. These shares are classified as potential Avoid candidates.

  4. Improving (Improving Quadrant): Shares in this quadrant are showing signs of improvement in relative strength, indicating that they are gaining momentum and starting to outperform the benchmark. These shares are considered as potential Buy candidates.


Interpreting RRG for Investment Insights

When analysing a Relative Rotational Graph, traders and investors can draw several meaningful conclusions:

  1. Identifying Leaders and Laggards: RRG helps investors quickly identify which shares are leading the market's upward trends and which are lagging behind. Leading shares in the Leading Quadrant might be attractive investment candidates, while those in the Lagging Quadrant could warrant closer examination to understand potential weaknesses.

  2. Spotting Trend Reversals: A changing position of a share on the RRG can signal a potential trend reversal. For example, a share moving from the Weakening Quadrant to the Improving Quadrant may indicate a shift in momentum and an upcoming upward trend.

  3. Diversification Insights: RRG can assist in portfolio diversification by highlighting shares that exhibit a low correlation with the benchmark. Adding shares with diverse movement patterns can help reduce overall portfolio risk.

  4. Monitoring Sector Rotations: RRG is especially useful for sector rotation strategies, where investors rotate their investments based on the relative strength of sectors. It helps identify which sectors are currently leading or lagging in the market.


Limitations of RRG

While RRG is a valuable tool, it is essential to recognize its limitations:

  1. Historical Performance: RRG is based on past price data and may not always predict future movements accurately.

  2. Not a Standalone Indicator: RRG should be used in conjunction with other technical and fundamental analysis tools for comprehensive decision-making.

  3. Volatility Impact: Highly volatile shares may exhibit erratic movements on the RRG, making interpretation challenging.


Conclusion

Relative Rotational Graphs provide traders and investors with a powerful visual representation of the relative performance of shares compared to a benchmark index or a group of shares. By understanding the quadrants and interpreting the movements of individual shares, investors can gain valuable insights into market trends, identify potential investment opportunities, and optimise their portfolio allocations. As with any investment analysis tool, it should be used alongside other methods and within the context of a well-thought-out investment strategy.


Top 40 Share constituent RRG chart:

The output displayed below compares the individual constituents of the JSE Top 40 index against the index itself. This output undergoes daily updates, and to enhance clarity, various colour backgrounds are utilised for ease of reference.

  1. Leading (Leading Quadrant): Green background. These shares are regarded as potential Profit takes or Hold candidates.

  2. Weakening (Weakening Quadrant): Yellow background. These shares are classified as potential Deteriorating candidates or short-selling.

  3. Lagging (Lagging Quadrant): Red background. These shares are classified as potential Avoid candidates.

  4. Improving (Improving Quadrant): Blue background. These shares are considered potential Buy candidates.


Assign ranking numbers to each share based on the overall RRG strength. The ranking of each share within a quadrant reflects the top selections.


 Leading quadrant

Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous

27 NPH 2.592932 0.037006 Leading Leading

40 WHL 2.497058 1.390024 Leading Leading

31 PRX 2.117654 0.514814 Leading Leading

28 NPN 1.793213 4.374207 Leading Leading

24 MRP 1.574264 0.632673 Leading Leading

15 FSR 1.497700 0.064776 Leading Improving

34 SBK 1.458240 0.431019 Leading Leading

7 BID 1.359871 3.412218 Leading Leading

36 SLM 1.335338 1.038843 Leading Leading

9 BVT 1.332489 1.615479 Leading Leading

1 AGL 1.308416 0.753534 Leading Leading


Weakening quadrant

Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous

21 INP 0.921995 0.265381 Weakening Weakening

11 CLS 0.821467 1.784242 Weakening Weakening

39 VOD 0.802793 0.019193 Weakening Weakening

32 REM 0.702187 1.607279 Weakening Weakening

3 ANG 0.595930 1.945317 Weakening Weakening

17 GLN 0.320321 0.232434 Weakening Weakening

18 GRT 0.232068 1.614346 Weakening Weakening

22 MCG -0.018574 4.607082 Weakening Weakening

29 NRP -1.228776 3.732242 Weakening Weakening


Lagging quadrant

Ticker RS_Current MOM_Current Quadrant_Current Quadrant_Previous

10 CFR 0.946425 -2.218689 Lagging Improving

25 MTN 0.889371 -8.851526 Lagging Lagging

26 NED 0.866320 -0.625751 Lagging Lagging

35 SHP 0.848646 -1.249543 Lagging Lagging

5 APN 0.787774 -7.650857 Lagging Improving

12 CPI 0.746835 -0.881732 Lagging Lagging

20 INL 0.672912 -2.672249 Lagging Lagging

13 DSY 0.660485 -3.613942 Lagging Lagging

8 BTI 0.496329 -0.306812 Lagging Lagging

14 EXX 0.489188 -2.260585 Lagging Lagging

6 BHG 0.420288 -0.268357 Lagging Lagging

23 MNP -0.022284 -2.979347 Lagging Lagging

37 SOL -0.385020 -2.714520 Lagging Lagging

33 RNI -0.648036 -1.228270 Lagging Lagging

16 GFI -1.851146 -0.738339 Lagging Lagging


Improving quadrant

Ranking   Share RS MOM

2 AMS 3.822984 -0.028611 Improving Leading

19 IMP 3.198683 -1.693307 Improving Improving

38 SSW 2.798460 -0.146595 Improving Leading

0 ABG 1.261359 -0.938841 Improving Improving

4 ANH 1.196773 -1.902001 Improving Improving

30 OMU 1.148128 -4.920942 Improving Lagging


Largest Changes in Relative Strength:

Ticker RS_Change MOM_Change

29 NRP 7.368084 -28.367941

30 OMU 5.881186 1.190777

33 RNI 4.584976 9.714855

13 DSY 4.138691 -3.691279

35 SHP 3.997091 1.720240


Largest Changes in Momentum:

Ticker RS_Change MOM_Change

5 APN -3.211421 36.691521

33 RNI 4.584976 9.714855

25 MTN 1.319575 9.098916

9 BVT 1.248682 6.161867

22 MCG 0.675692 6.057557


Changes in Quadrants:

Ticker Quadrant_Change

2 AMS Leading to Improving

5 APN Improving to Lagging

10 CFR Improving to Lagging

15 FSR Improving to Leading

30 OMU Lagging to Improving

38 SSW Leading to Improving






Comentarios


bottom of page