Hi Guys, here i am trying to share some key insights about relative price strength and how to use it in trading too. So first i will start from the definition below for it.
🎁What Is Relative Strength?
Relative strength is a way of trading used in momentum trading for identifying stocks. It focuses on trading in stocks or other that have performed well relative to the market as a whole or to a relevant benchmark. For example, a relative strength trader might select technology companies that have outperformed the Nasdaq Composite Index, or stocks that are outperforming the S&P 500 index.
🎁Benefits of RPS
Relative strength is a type of momentum trading used by technical analysts and pro traders.
It consists of selecting investments that have been outperforming their market or benchmark.
Relative strength investors assume that the trend of outperformance will continue.
🎁Disadvantages of RPS
Because relative strength investing assumes that present trends will continue into the future, it is most effective in stable periods with minimal disruption. By contrast, chaotic periods such as the 2007–2008 financial crisis or in COVID19 can be dangerous for relative strength investors because they can lead to sharp reversals of investment trends. In those situations, investor psychology can suddenly reverse, with yesterday's investment darlings suddenly being shunned.
🎁Example of RPS
Suppose Michael he is a momentum trader and is looking for a stock that grows the fastest compared to the market. The trend price of three different stocks in addition to the trend price of the market is provided. Based on RPS alone, which stock would Michael likely choose?
Year to date performance
Market +30%, Stock 1 is +40%, Stock 2 is +20%, Stock 3 is +23%,
The RPS of Stock 1 is 40%/ vs 30% = 1.3%
The RPS of Stock 2 is 20%/ vs 30% = 0.66%
The RPS of Stock 3 is 23%/ vs 30% = 0.76%
So if Michael is RPS trader he would like to go with stock 1 with the higher RPS.
Formula for Relative Price Strength
Trend price of a stock Divided by the trend price of market year till date.
🎁Many tools and indicators there are providing by Trading view we can use for it.
🎁What Is Relative Strength?
Relative strength is a way of trading used in momentum trading for identifying stocks. It focuses on trading in stocks or other that have performed well relative to the market as a whole or to a relevant benchmark. For example, a relative strength trader might select technology companies that have outperformed the Nasdaq Composite Index, or stocks that are outperforming the S&P 500 index.
🎁Benefits of RPS
Relative strength is a type of momentum trading used by technical analysts and pro traders.
It consists of selecting investments that have been outperforming their market or benchmark.
Relative strength investors assume that the trend of outperformance will continue.
🎁Disadvantages of RPS
Because relative strength investing assumes that present trends will continue into the future, it is most effective in stable periods with minimal disruption. By contrast, chaotic periods such as the 2007–2008 financial crisis or in COVID19 can be dangerous for relative strength investors because they can lead to sharp reversals of investment trends. In those situations, investor psychology can suddenly reverse, with yesterday's investment darlings suddenly being shunned.
🎁Example of RPS
Suppose Michael he is a momentum trader and is looking for a stock that grows the fastest compared to the market. The trend price of three different stocks in addition to the trend price of the market is provided. Based on RPS alone, which stock would Michael likely choose?
Year to date performance
Market +30%, Stock 1 is +40%, Stock 2 is +20%, Stock 3 is +23%,
The RPS of Stock 1 is 40%/ vs 30% = 1.3%
The RPS of Stock 2 is 20%/ vs 30% = 0.66%
The RPS of Stock 3 is 23%/ vs 30% = 0.76%
So if Michael is RPS trader he would like to go with stock 1 with the higher RPS.
Formula for Relative Price Strength
Trend price of a stock Divided by the trend price of market year till date.
🎁Many tools and indicators there are providing by Trading view we can use for it.
