Here's a crash course in RRG.
First, let's understand what it is and what it is not.
RRG is not a market timing indicator (but there's a trick to make it so, see below). Rather RRG measures the relative performance of a stock or sector to some benchmark (typically SPX). The idea is that with RRG you gain an awareness of sector rotations and understand which sectors are coming in favor and which ones are waning.
I recommend that you read more about it here: Relative Rotation Graphs (RRG Charts) - ChartSchool
The standard RRG is a scatterplot. But it is not possible to plot that in standard time series stock charts. So instead, we put two lines: The green line is the relative strength, and the red line is its rate of change, aka relative momentum. The background colors are the quadrant colors that tell you if RS or RM is rising falling below the benchmark.
This is easier to see more clearly if you read the link above. For the sake of convenience, I'm copying a graph from them.
Now let's talk about what I did with it and how you can use it as a potential timing signal (but still within the context of sector rotation).
In my RRG chart, I used Valueline's geometric index as the benchmark because it measures the performance of the median stock. This means there is a bias towards smallcaps and riskier stocks. But it also means that you are measuring against the average Joe rather than the megacaps that dominate SPX or NDX.
Given the heavy representation of megacaps in the indexes, you could make yourself a timing indicator of sorts if plot the RRG of say SPXEW against NDX.
One of my enhancements relative to what Stockchart gives is to plot the quadrant colors in the background. This allows for another timing signal. Generally speaking you want to buy when the colors improve and sell when they deteriorate. But as the examples below show, always season the signal with other indicators.
It's important to understand that a buy or sell signal doesn't mean that it is will go up or down. Rather it is says that relative to the benchmark, you are better off to have owned it or not.
The real enhancement is in how I enhanced the RRG via trend analysis and took trend quality into account.
In the charts below there are two RRG indicators. Both have the exact same parameters (benchmark, smoothing, window, etc).
The upper one is standard RRG.
The lower one is my enhanced RRG.
Relative to the standard, it is smoother with fewer whipsaws and arguably better timing signal changes. But that is just my opinion and I am biased. You decide for yourself.
BTC 3-day chart
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