Relative weakness
What does it mean when one asset falls behind a similar asset, and how do traders measure the gap?
In plain words
Relative weakness describes one asset producing a worse return than another asset it usually moves with. Traders measure it as the difference between the two returns, or as the percentage change in the price ratio between them over the period.
Why it matters
When two assets usually rise and fall together but one lags, the gap may signal pressure specific to that asset rather than a market-wide move. It matters for pair trades, where the position profits from the gap widening or narrowing, and for anyone judging whether weakness is general or specific to one asset.
In a real week: BTC, week of 7 June 2021
In the week of 7 June 2021, BTC returned 9.01% while ETH lagged by 16.48 percentage points. The ETH-BTC ratio fell 15.12% over the week, and the hourly correlation between the two was 0.88. They tracked each other closely, yet ETH fell behind BTC over the week.
A common mistake
Assuming relative weakness means the two assets decoupled. Here correlation stayed high; one asset simply drifted lower against the other, which is a different signal from the pair moving independently.