Relative strength

Measuring relative strength and relative weakness is a common, simple but powerful concept for stocks analysis.

This is a principle of measuring relative performance between two (or more) symbols within a defined period of time.

You can check this performance for the last year, half year or a shorter time frame.

My charts measure a three-month time frame. Since my trades are swing trades lasting between one day up to four weeks, I check my charts for performance during last two or three weeks of price movement.

Why is relative strength so important for trading ?

When you find a “strong” stock, you can see stock with money coming into stock shares. The “big boys” are greedy for this stock and so are buying it and pushing the price up. So you can buy it too, and just wait as someone else does the work (pushing the price up). Nice, isn't it? It’s like being on a boat navigating down the river. Remember this stock trading tip:

A stock with relative strength is a good candidate for a long trade.

When you find a good stock, wait for a pullback or breakout trade setup.

So, how you can check if stock is strong or not? I do it by comparing two stock charts.

Here is an example:

relative strength stock chart 01

realtive stregth stock 02

What we can see on these charts? I checked them and found these important points:

the price of INTC is rising, there’s an uptrend
the price of MXIM is falling, there’s a downtrend
INTC acts much better then MXIM
INTC is stronger stock then MXIM
INTC is a better candidate for a long trade
MXIM is a better candidate for a short trade

I found that the test for relative performance of two symbols can be done very easily by viewing the charts.

Do you understand how this comparison was done? If not, please send me your questions .

You can also compare a stock’s relative performance to a sector or industry. Check the stocks above with the chart of the Industry Index (Semiconductors).

Relative strength Industry chart

As you can see INTC is relatively stronger than the industry index (DJUSSC - Dow Jones SEMICONDUCTOR INDEX). And MXIM is definitely relatively weaker than this index.

If I think about a long trade with some semiconductor stock, then I would prefer INTC to MXIM.

And finally, it’s also good to compare performance between major stock market indexes.

relative performance of stock market index

relative performance of stock market index chart

Both indexes are in an uptrend, but the NASDAQ Composite index is much higher than important moving averages like the Russell 2000 Index. This indicates that the NASDAQ Index is much stronger than the Small Cap Russell 2000 index.

!! My stock chart analysis tip:
Moving averages can help us to visualize relative strength or weakness. If you see that one stock is above key moving averages (I use 20 a day and 50 a day) and another is under them, then the first stock is stronger than second one. You can see it also on the examples above.

Return from Relative strength to stock chart analysis

footer for relative strength page