Finding Relative Strength or Weakness

[rangarajan]

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Wait until the stock market sells off hard for a few days. Now go through the stocks on your watch list. Which ones are up for the day that the market has sold off? Those stocks have relative strength and those are the ones that you should trading. Why? Because these stocks will be the ones that will move first when the market recovers and will make the most significant gains. Also, look at charts for the various industry groups. Which ones are up on big down days in the market? Those industry groups have relative strength and those are the ones you want to be in.

This is completely the opposite on the short side. On big up days in the market look for the industry groups and stocks that are down for the day. These are weakest and the ones that you should be focused on for shorting.

Do not underestimate the simplicity of this technique! If you mainly trade on the long side of the market, use the down days in the market to go through your watch list. Find the stocks that are up for the day, showing relative strength. Then wait for the right time to enter the stock.

 

[anuragmunjal]

hi.
thnx fr providing this interesting insight. as a matter of fact, I toyed with this idea a few yrs back, but since I know practically nothing about how the softwares work, I could not do do any useful backtesting on this. also since I was a very short term trader at that time, it was difficult 2 shift my focus to long term trading. it would be really helpful if u could provide some backtested results or specific examples to elaborate this method.

regards

Anurag

 

[SwingKing]

From :ttp://www.swing-trade-stocks.com/relative-strength.html

Wait until the stock market sells off hard for a few days. Now go through the stocks on your watch list. Which ones are up for the day that the market has sold off? Those stocks have relative strength and those are the ones that you should trading. Why? Because these stocks will be the ones that will move first when the market recovers and will make the most significant gains. Also, look at charts for the various industry groups. Which ones are up on big down days in the market? Those industry groups have relative strength and those are the ones you want to be in.

This is completely the opposite on the short side. On big up days in the market look for the industry groups and stocks that are down for the day. These are weakest and the ones that you should be focused on for shorting.

Do not underestimate the simplicity of this technique! If you mainly trade on the long side of the market, use the down days in the market to go through your watch list. Find the stocks that are up for the day, showing relative strength. Then wait for the right time to enter the stock.

Dear Rangarajan,

Indeed the concept of relative strength is quite intriguing. However, one has to combine it with a proper methodology to make use of it. Simplicity of the tool lies in its application and hence what you have mentioned in your post is something which is useful but has to be used in a different way.

Let me give you an example. When the market's were correcting in January this year, Dabur showed tremendous relative strength and rallied from 140 odd levels to about 180. Now going by what you mentioned, someone should have bought Dabur as this would have been the first stock to move up when the market's started moving up. Did this happen ? Well, Nifty went up by 500 points and Dabur corrected back to 155 levels. Also, when a market sells off and relative strength of a stock remains upward sloping, it necessarily does not indicate that the stock went up. It may also indicate that the stock has fallen lees when compared to the market fall.

This does not say that your strategy does not work. It just highlights that though the concept of relative strength is very useful, it has to be combined with other factors to be profitable. Hope you get my point.

Thanks for your post.

 

[anuragmunjal]

Dear Rangarajan,

Indeed the concept of relative strength is quite intriguing. However, one has to combine it with a proper methodology to make use of it. Simplicity of the tool lies in its application and hence what you have mentioned in your post is something which is useful but has to be used in a different way.

Let me give you an example. When the market's were correcting in January this year, Dabur showed tremendous relative strength and rallied from 140 odd levels to about 180. Now going by what you mentioned, someone should have bought Dabur as this would have been the first stock to move up when the market's started moving up. Did this happen ? Well, Nifty went up by 500 points and Dabur corrected back to 155 levels. Also, when a market sells off and relative strength of a stock remains upward sloping, it necessarily does not indicate that the stock went up. It may also indicate that the stock has fallen lees when compared to the market fall.

This does not say that your strategy does not work. It just highlights that though the concept of relative strength is very useful, it has to be combined with other factors to be profitable. Hope you get my point.

Thanks for your post.

hi
thnx fr this educative post. if possible pls. elaborate on the 'other factors' that u stated in ur post which can be seen along with relative strength.

regards

Anurag

 

[SwingKing]

hi
thnx fr this educative post. if possible pls. elaborate on the 'other factors' that u stated in ur post which can be seen along with relative strength.

regards

Anurag

Refer to this post. There's a small example on relative strength

http://www.traderji.com/technical-a...s-using-technical-analysis-17.html#post402156

 

[rangarajan]

hi.
thnx fr providing this interesting insight. as a matter of fact, I toyed with this idea a few yrs back, but since I know practically nothing about how the softwares work, I could not do do any useful backtesting on this. also since I was a very short term trader at that time, it was difficult 2 shift my focus to long term trading. it would be really helpful if u could provide some backtested results or specific examples to elaborate this method.

regards

Anurag

Dear Anurag,
I have not back tested. While surfing,i got this & posted. In fact i had come across this concept first in Traderji's Q & A Thread. U may go thro this thread which is very useful & highlights on this concept by Traderji.

Happy Trading.

 

[rangarajan]

Dear Raunak Agarwal,

I agree. We could keep such stocks in our radar & take decision along with other indicators.

Ranga