Comparison Overlays and Ratio Charts
Plotting two securities together, or dividing one by the other. The second is more informative and is used far less.
MadStockAlerts Research · Updated August 28, 2026
What to take away
- An overlay plots two series rebased to a common starting point.
- The starting point is a choice, and it determines the whole comparison.
- A ratio chart divides one by the other, which removes the starting-point problem.
- A rising ratio means the numerator is outperforming, whatever both prices did.
- Ratio charts are how relative strength is read.
MAD Academy Training Video · 0:45
Compare Percentages, Never Prices
Overlaying two securities on one price axis is meaningless. Rebasing both to a common start is what makes the comparison real.
This lesson is part of a Stock Alerts + Tools plan.
The overlay, and its weakness
An overlay rebases two securities to a common value at a chosen date and plots both. It answers which has performed better since that date, and the answer depends entirely on the date chosen.
Moving the start by a few weeks can reverse the conclusion, particularly where one of the securities had a sharp move near the original start. That sensitivity is invisible on the chart, which shows one starting point as though it were the only one.
The ratio chart
Dividing one series by the other produces a single line. Its level is arbitrary and its direction is not: rising means the numerator is outperforming, falling means the denominator is, and no starting point had to be chosen.
Scroll the chart sideways to see all of it.
- The security
- Its sector
- The ratio, rebased
What ratio charts are used for
| Ratio | The question |
|---|---|
| Security against a broad index | Is it outperforming the market |
| Security against its sector | Is it outperforming its peers, with the sector move removed |
| Sector against the index | Is the sector leading or lagging |
| Equal-weight index against cap-weight | Is the average constituent keeping up with the largest |
| Two asset classes | Which is being favoured, without reference to either level |
Every row asks a relative question, and none of them can be answered from either price chart alone. That is the whole argument for the construction.
Reading them carefully
- The level means nothing; only the direction and the structure do.
- A ratio can rise while both securities fall, which is frequently the point.
- Indicators applied to a ratio line are computed on a derived series, with the usual caveat.
- Currency differences enter a ratio between securities listed in different currencies.
The second item is the one worth internalising. A rising relative strength line is not a statement that the security is going up, and treating it as one is the most common misreading of the construction.
Constructing a ratio, and reading its structure
Because a ratio line is a series like any other, the whole vocabulary of levels, trends and moving averages applies to it, and applying them is what turns it from a curiosity into a tool.
- A ratio breaking to a new high means the relative outperformance has reached a new extreme.
- A ratio holding a level repeatedly means the relative relationship has been defended.
- A moving average of the ratio smooths the relative trend without reference to either price.
- The same caveats apply: an indicator on a ratio is computed on a derived series.
The last item is the standing caveat. A ratio of two series is two steps removed from the trades that produced it, and any measure computed on it inherits both transformations.
The practical use in sector work is to compute the ratio of each sector against the index and read the structure of those lines rather than of the sector prices. That is what the rotation section of the sectors guide describes, made explicit.