Construction of Relative Rotation Graphs
The construction of Relative Rotation Graphs is based on a scatter plot. The video at the end of the post shows the rotation through the various stages on the plot, with a short explanation for every stage.
The RRG takes two inputs. The JdK RS-Ratio values on the x-axis (horizontal) and the JdK RS-Momentum values on the y-axis (vertical). The center point of the plot (100,100) is the base or the benchmark against which all elements in the plot are measured.
From the leading quadrant
This means that in the top right-hand quadrant, the Leading quadrant, items will show up that are exhibiting a positive trend in their relative strength and this positive trend is still being pushed higher by a positive momentum. As wel all know momentum, or rate of change, is a leading indicator. So as soon as the pace of the RS-Ratio line starts to fade its rate of change will start to decline. When the rate of change turns negative, the RS-Ratio line has formed a top and started to decline.
Down to weakening
At this moment, when the JdK RS-Momentum line drops below the 100-level, the item moves into the lower right-hand, the weakening, quadrant.
Further into lagging
If the weakness in relative strength persists and the negative momentum continues to push the RS-Ratio line down below the 100-level (on the RS-Ratio axis) the element moves into the lower left-hand quadrant of the plot, the lagging quadrant.
In that lagging quadrant we find the elements of which relative strength is in a down trend which is still being pushed further down by weak momentum.Back up into improving
The up-turn follows the same anatomy as the down-turn. The first thing that will happen is that JdK RS-Momentum will start to pick up, signalling that the pace of the down trend is faltering. When the RS-Momentum line crosses above the 100-level a low has been formed in the RS-Ratio line which by that time has started to move up. At that time, when RS-Momentum crosses above 100, the item moves into the top left-hand quadrant, which is labeled the improving quadrant. Items in this quadrant are still showing a negative trend in relative strength but the worst is over and the forming of a low is in process.
Creating a full rotation
Eventually when this improvement continues the RS-Ratio line will rise above the 100-level as well which brings it back into the top right, leading, quadrant, completing a full rotation.
Showing a tail or trail
In order to put the move of an element through the RRG plot into perspective the observations can be connected which creates a 'trail'. This trail shows the rotation over the past n observations and as it is based on a trend-following approach a continuation of that rotation may be assumed under normal circumstances.
A static RRG plot shows the trail over the past n observations, dynamic RRGs show the trail over time moving it forward one observation at a time. This creates the 'snake-like' movement that visualizes rotation of relative strength among elements in a universe.
