RS vs RSI: The Key to Crafting a Winning Trading Strategy (Relative Strength Index)
- FinancialWisdom
- Aug 9
- 6 min read
Updated: Sep 7
Learn how to apply RS and RSI to identify trends
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Video Transcript Below:
This could be one of the most beneficial videos for any trader struggling to understand the difference between Relative Strength and the Relative Strength Index. Here's a staggering fact: Mark Minervini and David Ryan made millions using William O'Neil's RS system, yet 90% of new traders completely confuse it with RSI - and this confusion is costing them both time and money, hours in screening and thousands in missed opportunities and poor entries.
In this video I will breakdown the RS and the RSI to clear this confusion. I'm going to show you exactly why this confusion exists, how these two completely different tools work, and most importantly, how legendary traders like Minervini used the correct one to generate extraordinary returns.
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Let me start with the core distinction that most traders miss entirely.
Relative Strength - or RS - measures how a stock performs compared to other stocks or broad market indices. It's about ranking and comparison within the universe of available stocks.
The Relative Strength Index - RSI - measures how a stock performs compared to its own past price performance. It's an internal momentum oscillator.
Think of it this way: RS asks "How is this stock doing versus everything else?" while RSI asks, "How is this stock doing versus itself?"
This fundamental difference in what they're measuring leads traders in completely different directions. One identifies market leaders before they explode, the other scares new traders, keeping them away from trending stocks by labelling them as overbought.
Here's how William O'Neil's revolutionary RS ranking system actually works, and why it's so powerful.
O'Neil created a percentile ranking system where all stocks are ranked based on their 1-year performance. Let me show you with a simple example: If we have 30 stocks in our universe, we sort them by performance and assign rankings in deciles.
The top three performers fall into the 90+ RS ranking - these are your market leaders. The next three get 80+ rankings, and so on down the line.
Here's the critical insight: This list is dynamic. It calculates performance from the current date going back one year - not calendar year performance. This means the rankings constantly update based on rolling 12-month performance.
O'Neil's research from the 1950s through 2008 revealed something extraordinary: The average RS rating of the best-performing stocks before their major run-ups was 87. Think about that - the biggest winners were already outperforming 9 out of 10 stocks before they made their most explosive moves.
As O'Neil stated in his book: "The rule for those determined to be big winners in the stock market is: look for genuine leaders and avoid laggards. Don't buy stocks with Relative Strength ratings in the 40s, 50s, or 60s."
This is exactly how Mark Minervini and David Ryan generated their legendary returns - they followed this principle religiously.
"Now, there are other ways to assess relative strength beyond O'Neil's formal ranking system. These methods may not be as objectively quantified, but they're more observatory in nature - and you'll only master them after spending considerable time observing and trading markets.
For example, one simple way to identify high RS stocks is to measure their performance against a broad market index. Some charting and trading platforms allow you to plot a relative strength line that does the comparison for you.
Picture this: the markets are in correction, yet there's a set of stocks posting positive returns over the last three months. That divergence is relative strength in action. These stocks could be the emerging leaders of the next bull market, ready to explode once the broader market stops falling.
To make this even more practical: first identify a leading sector by comparing its index performance to other sectors and a broad market index say S&P 500 or NASDAQ 100. Then, within that leading sector, compare all the individual stocks, rank them, and pick the top performers as your candidates.
Let me show you how this played out in actual market leaders.
Here's Zoom in 2020. While the NASDAQ 100 was crashing during the pandemic selloff, Zoom was exploding upward. The worst week for the index was literally the best week on Zoom's chart - that's massive relative strength in action.
As soon as the markets recovered, Zoom delivered a 5x return in less than eight months. This is the power of identifying stocks with superior relative strength during market stress.
Look at Palantir in 2023. While the markets recovered about 50% from correction lows, Palantir was up over 200% from its low. It went on to become a super multi-bagger, rising another eight times over two years.
This is what genuine relative strength looks like - stocks that dramatically outperform during both down markets and recovery phases.
Now let's address the Relative Strength Index or RSI and its proper application.
RSI is an oscillating indicator that compares a stock's strength on up days versus its weakness in down days over a lookback period. When there are more and bigger up days than down days in the period, the reading moves toward the upper band, approaching overbought levels of over 70.
Here's where most novice traders fail: They assume overbought means the stock will immediately reverse and fall. This is completely wrong. Trending stocks - especially market leaders - remain overbought for weeks before any meaningful pullback.
A tactical use of RSI could be timing pullback entries in stocks that already show strong relative strength. You start with RS to identify the leaders, then use RSI on weekly charts to time your entries.
Let me show you how to use both tools correctly together.
Going back to Zoom, it showed overbought readings above 70 on the weekly RSI in mid-February 2020. The proper approach is to wait for the RSI to drop back below 70, then start building positions, completing your position when RSI returns above 70.
Zoom offered four such pullback opportunities, with the second being most rewarding as the stock surged over 150% in just a few weeks.
Palantir provided two similar opportunities during its massive run.
But here's the crucial point: This works best with stocks that first pass the relative strength filter. You cannot apply this to random stocks hitting overbought levels. The reason is simple - RS leaders are under institutional accumulation with big money following them, while random overbought stocks may lack this institutional support.
Starting with RS narrows your universe from hundreds of potentially overbought stocks to just the genuine leaders worth your attention.
The difference between RS and RSI isn't just academic - it's the difference between following institutional money into market leaders and chasing random momentum plays that often fail.
Don’t forget: Relative Strength identifies the leaders before they make their biggest moves. The average RS rating of major winners was 87 - they were already outperforming 9 out of 10 stocks before their explosive advances.
RSI can serve as one of your timing tools, but only after you've identified genuine leaders through relative strength analysis.
Here's what separates profitable traders from the struggling masses: The profitable ones understand that successful trading isn't about finding the perfect indicator - it's about using the right tool for the right job at the right time.
Most traders are looking for shortcuts and magic formulas. But the real edge comes from understanding principles that have worked for over a century, from Wyckoff to O'Neil to today's market leaders.
If you're serious about improving your trading results, stop confusing these two completely different tools. Start with relative strength to identify tomorrow's leaders, then screen for setups in those names to time your entries in those leaders. You can use RSI as one of the setup tools. It goes without saying, regardless of your confidence in scanning and setups, always enter the trade with a stop loss. That is non-negotiable.
Your trading success depends on understanding these fundamentals. Don't let confusion cost you the next big winner.
Thanks for watching.
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