Relative strength

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

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

You can check this performance during last year, half year or smaller time frame.

I like to measure it on my charts where is 3 month time frame charted. As my trades are swing trades lasting between one day up to 4 weeks, I check this performance during last 2 or 3 weeks of price action on my charts.

Why is relative strength so important for trading ?

When you find "strong" stock, you can see stock with money coming into stock shares. "Big boys" are greedy to own this stock and are buying it and pushing price up. So when you buy it too, you can wait as the work (pushing the price up) is done by someone else. Nice, isn't it ? It is like be on the boat navigating down the river. Remember this stock trading tip:

Stock with relative strength is good candidate for long trade.

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

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

Here is example:

relative strength stock chart 01

realtive stregth stock 02

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

price of INTC is rising, there is uptrend
price of MXIM is falling, there is downtrend
INTC acts much better them MXIM.
INTC is stronger stock then MXIM
INTC is better candidate for long trade
MXIM is better candidate for short trade

I found that test for relative performance of two symbols can be done visually very easy.
Do you understand how this comparison was done ? If not, please send me your questions .

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

Relative strength Industry chart

As you can see INTC is relative stronger then industry index (DJUSSC - DowJones SEMICONDUCTOR INDEX). And MXIM is definitely relative weaker then this index.

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

And finally it is 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 uptrend but Nasdaq Composite index is much higher above important moving averages then Rusell 2000 Index. So this indicate us that Nasdaq Index is much stronger Small Cap Rusell 2000 index.

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

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