How to invest using Relative Strength and Relative Weakness
Relative strength or relative weakness is assessing how strong or weak a stock is compared to something else, whether it be against the market, other stocks in the same sector, or other stocks in general. Using relative strength or weakness has been around for a long time and there are many traders who make a considerable living trading only this approach.
In terms of relative strength to the market, you want to long stocks that are stronger than the market and short stocks that are weaker than the market. When you are looking at sectors or industries, you want to long the strongest stocks within that sector or industry and short the weakest ones. You can also see how different sectors or industries are acting to see which ones are leading the market and which ones are lagging. You can then long stocks from the sectors or industries are leading the market and short stocks from the ones that are lagging.
You want to compare the way the different stocks and the market are performing in terms of percentage change from the open so that you don’t get lured into thinking that stocks that gapped up or down are stronger or weaker than they really are. Look for stocks that are outperforming or underperforming the market by a good margin. There is more momentum in the trend of a stock and moves that are not as big in the pullbacks or corrections in stocks that are stronger or weaker than the market and are showing signs of interest from institutions.
Stocks that are up on days when the market is selling off have relative strength. These are the stocks that you should be long on. And vice versa, stocks that are down on days when the market is having a big up days have relative weakness and these are the stocks that you should be short. By implementing this approach, you will vastly improve your trading.
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