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On this week’s podcast we talked to Trevor Neil, Director of RRG Research, on the phenomenon of relative rotational graphs, a type of technical analysis. Neil is a widely known figure in the technical analysis field, teaching courses for London Stock Exchange and hosting a technical analysis surgery for Refinitiv.

Neil formed RRG Research 10 years ago to bring this type of market analysis to the investment world. These graphs were designed to draw investors attention to a simple picture that can cover the relationships between securities in a quadrant format. RRG is now available as a function on Bloomberg, helping investors like fund managers who want to be able to choose a group of securities from within a larger universe like an index.

Ultimately relative rotation graphs can show traders how a group of stocks stack up against each other without having to make thousands of binary comparisons. It takes the momentum of relative strength, and distils it into a quick piece of analysis.

On Bloomberg numerous different groups of stocks can be created in order to create this kind of each to each analysis. It is not restricted to stocks either – comparison can be made between the USD and cryptocurrencies for example. This analysis can show which securities are the strongest but also the momentum of the relative strength.

Relative rotation graphs have been around for quite some time and have proved to be very popular. State Street for example uses RRGs to compare their range of ETFs to the S&P 500. Neil and his team also work closely with hedge funds, building bespoke analysis and overlays and incorporating fundamentals.

RRG Research has worked with CFD broker CMC Markets on the launch of index products – using a custom built quantitative criteria to give a signal across a number of different markets. They started off with the UK 350 but are now releasing a number of other baskets, including products based on the US 500, Australia and the US Growth 1000.

When looking at a relative rotation graph, investors are usually most interested in stocks in the north-east quadrant of the scattergram. Stocks furthest to the right are the strongest stocks – anything in the top right hand quadrant combines both outperformance AND positive momentum. Top left can also be interesting as they are currently underperforming but do have positive momentum. Securities rotate clockwise around this pattern. The best direction for a stock – or other security – to be moving is in a north easterly direction.

In the case of the CMC CFD baskets, the portfolios are based on the 10 stocks that are the most to the north-east. This is rebalanced on a quarterly basis. You have a portfolio with just 10 stocks which are going to be the top performers in that index.

If investors have made a decision about investing in a company, RRGs can also be used to compare that stock against a very similar stock just to see whether it has more momentum relative to one or more peers.

We also talk on the podcast about the limitations of relative rotation graphs and when they don’t work – e.g. hidden factors like different currency denominations or different opening and closing times for markets.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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