Finding and focusing on stocks that are out-performing the general market can be considered one of the keys for achieving consistent returns in the stock market. Investing and trading this way is based on the concept of Relative Strength Comparison (RSC) and the theory that stocks that are currently outperforming the overall market will generally continue to do so.
This approach takes advantage of the fact that a stock’s price movement gathers strength as its price continues to rise. Despite this relatively simple concept, many people continue to ignore the use of RSC and similar tools. Instead they try, in vain, the low probability approach of picking turning points. They should be concentrating on the provable higher probability approach of ‘joining the herd’ or ‘running with the crowd’. In this article we will take a look at RSC techniques and how to use them in your trading and investing decision making process.
The Relative Strength Comparison (RSC) compares the securities price movement with that of a ‘base’ security. This ‘base’ security can be the overall market index, such as the All Ordinaries Index, or a sector index like the Materials sector index for mining and resource stocks.
When the RSC indicator is moving up, it shows that the security is performing better than the base security; rising faster or not falling as fast. When the indicator is moving sideways, it shows that both securities are performing in a similar way; rising and falling by the same percentages. When the indicator is moving down, it shows that the security is performing worse than the base security; rising as fast or falling faster.
The RSC can be used as part of a ‘top-down’ approach to home in on the best performing stocks. Imagine it to be like a magnifying glass that enables you to ‘zoom in’ on the outperforming stocks.
In the top down approach, the RSC is first used to identify the Sectors that are outperforming the broad Market Index. Once the outperforming sectors are identified, all the individual stocks within those sectors can then be compared against their respective sector indices, to quickly and easily find the best performing stocks overall.
With the use of the RSC Scan built into Beyond Charts+, this process takes only a few minutes each day.
See for yourself. This video demonstrates how you can practically implement Relative Strength Comparison into your trading and investing.