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Registered User
Joined: 11/28/2005
Posts: 7
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Does Relative strength with industry index works? I used to have confidence in RS method in finding the best stock in a industry till I started calculating statistics regarding the performing of RS stocks. I locate a basket of top perfoming RS stocks after comparing with the industry index across different industry and thereafter compare the return of this basket of stocks with the rest of stock in the same industry. What was found was that the return of stocks in this basket was not consistent. Some did average and others did poorly. Some even perfom below the S&P index and industry index. Does anyone knows how to improve the RS method in locating stocks so the perfoming are more consistent?
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Worden Trainer
Joined: 10/1/2004
Posts: 4,308
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You may wish to view the following videos:
Uncover the stocks driving the strongest industry groups
Using the Industry Menu to analyze stocks relative to their industries and sub-industries
Use Comparison and Relative Strength graphs to compare a stock to the rest of its industry group
Sorting Stocks by their Absolute or Relative Performance
- Doug
Teaching Online!
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Registered User
Joined: 1/28/2005
Posts: 6,049
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skyblue22
What are you defining as "relative strength" vs sp-500?
Over a certain period of days?
When you check stocks performance are you using stop loss methods?
Most studies have shown that RS improves performance but it all depends on how it is
defined.
Thanks
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Registered User
Joined: 12/19/2004
Posts: 457
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How long of a lookback are you using for RS? RS is best used on weekly time frames. Daily RS lines are very noisy, even if you use moving averages.
A strong stock that just broke out of a base is a good stock to get long. Likewise, a strong stock with price momentum divergences might not be the best one to go with.
RS is just a screening tool. The selection ultimately depends on the individual chart. I routinely find weak stocks to buy, and strong stocks to short.
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Registered User
Joined: 11/28/2005
Posts: 7
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I did my studies both in weekly and daily time frame. I use period ranging from 1 month to 6 months and subsequently measure the return of those stocks. For instance locate top a portion performing stocks for 3 months RS scan and meansure the return of them in next 3 months. The results are not consistent with more than half falling below the index return. Anyone has success in using RS tool? Pls provide some insight. Tks.
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Worden Trainer
Joined: 10/1/2004
Posts: 18,819
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It is very important to remember what RS is measuring. A stock with strong relative strength has outperformed the comparison over the time period measured. It is stricktly a measure of price. Depending on the index's performance, the stock could of trended up, sideways or even down and still have a strong relative strength.
I would consider what diceman says above. Blind backtesting is of little value as you will not be buying and holding every stock based soley on one indicator. Maybe you should papertrade using the indicator and all of your other analysis tools and see if adding RS to your weapon cache improves your results.
- Craig
Here to Help!
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Registered User
Joined: 1/28/2005
Posts: 6,049
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skyblue22
James O'Shaughnessy in "What Works On Wallstreet" showed that after creating a fundamental scan for stocks. Only using the top stocks based on 12 month percent change, improved the results.
Paul Merriman has shown that mutual funds and etfs can be traded using 100 day percent change. The top 4 or 5 are selected. When they fall below their 100 day moving average, you run the sort again and go into the new strong fund.
I currently trade a mutual fund system that scans for top funds based on 250 day percent change. The concept is to constantly rotate into the top sectors of the market.
I have also seen systems where stocks are scanned based on 250 day percent change.
Only the top 10% are buy candidates. They are held until they fall below the top 20% rank.
Another method is to scan for strong industry groups. Then find the strongest stocks in those groups.
What your system seems to be missing is a sell filter so that you can drop those and
invest in the new strongest performing stocks.
Hope that helps
Good Luck
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Worden Trainer
Joined: 10/1/2004
Posts: 18,819
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Be sure to watch the videos Doug linked above.
- Craig
Here to Help!
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