Relative Strength Trading

[tatrader]

I use a graph like the above to find stocks in the S&P 500 with high Relative Strength.

The blue bars represent the long-term strength of the stocks and the red bars the short-term strength.

I usually choose stocks that show a "good" combination of both long- and short-term strength.

For example, SIG, FDX, RRC, PWR have promising strength, both long- and short-term.

I then look at the chart of these stocks to find additional reasons to buy them.

Finally, I use strict money and risk management. Out safety net when things go wrong!

What do you think about this approach?

 

[1nvest]

View attachment 289648

I use a graph like the above to find stocks in the S&P 500 with high Relative Strength.

The blue bars represent the long-term strength of the stocks and the red bars the short-term strength.

I usually choose stocks that show a "good" combination of both long- and short-term strength.

For example, SIG, FDX, RRC, PWR have promising strength, both long- and short-term.

I then look at the chart of these stocks to find additional reasons to buy them.

Finally, I use strict money and risk management. Out safety net when things go wrong!

What do you think about this approach?

You could go one step further and keep 10 stocks and rotate them. Each month you review the list and drop the stragglers.
Depends however on your list of stocks, your timeframe and also how you measure relative strength
Each one of these factors can significantly affect the return
Otherwise its a great idea. You can seriously make a lot of money with this approach

 

[WalletInvestor]

Interesting approach! How do you quantify the strength of a stock?

 

[tatrader]

Interesting approach! How do you quantify the strength of a stock?

I use a combination of the daily, weekly and monthly momentums for the short-term strength and three- six- and twelve-month momentums for the long term.

Work quite well in practice.

 

[tatrader]

You could go one step further and keep 10 stocks and rotate them. Each month you review the list and drop the stragglers.
Depends however on your list of stocks, your timeframe and also how you measure relative strength
Each one of these factors can significantly affect the return
Otherwise its a great idea. You can seriously make a lot of money with this approach

I've just started the thread and I didn't have the opportunity to fully expand my idea.

What I do is concentrate on stocks from strong sectors, Technology for example.

In practice, this enhances my chances.

And of course I choose more about five stocks at any time.

You could go one step further and keep 10 stocks and rotate them. Each month you review the list and drop the stragglers.
Depends however on your list of stocks, your timeframe and also how you measure relative strength
Each one of these factors can significantly affect the return
Otherwise its a great idea. You can seriously make a lot of money with this approach

 

[1nvest]

I've just started the thread and I didn't have the opportunity to fully expand my idea.

What I do is concentrate on stocks from strong sectors, Technology for example.

In practice, this enhances my chances.

And of course I choose more about five stocks at any time.

Of course, I was just throwing in a couple of additional points
Your theory is perfectly sound. Strongest stocks from the strongest sectors just doesn't fail.
And you mentioned momentum above to gauge strength..a recipe for success no two ways about it.
Look up meb faber if you haven't heard of him
The only additional thing is bringing up an element of market timing, which meb also talks about
Will follow with interest

 

[tatrader]

We can see the strongest S&P500 stocks long- and short-term.

I use this chart to choose some stocks and then I use simple technical analysis - moving averages, candlesticks, Bollinger Bands, support & resistance - to narrow down the possible tradable stocks.

The other thing I'm looking for is the stocks' Relative Strength.

It must be going up and above its 20-day moving average.

The chart of GPS, for example, is:

1. Price moves above its rising 20-day moving average - the green box.

2. Price broke above a resistance line - the blue line.

3. Price reached the upper Bollinger Band with a huge bullish candlestick, a sign of strong uptrend

4. The stock's Relative Strength is going up and mostly above its 20-day moving average - the yellow box.

 

[tatrader]

The strongest Index, Sector, Industry and World ETFs for October 26th

 

[tomorton]

View attachment 289648

I use a graph like the above to find stocks in the S&P 500 with high Relative Strength.

The blue bars represent the long-term strength of the stocks and the red bars the short-term strength.

I usually choose stocks that show a "good" combination of both long- and short-term strength.

For example, SIG, FDX, RRC, PWR have promising strength, both long- and short-term.

I then look at the chart of these stocks to find additional reasons to buy them.

Finally, I use strict money and risk management. Out safety net when things go wrong!

What do you think about this approach?

Good post. This approach involves buying into strength, at new highs if necessary. This can be a seriously rewarding approach but it requires even stricter discipline than more conventional approaches.

One thing I am interested in is where you place your stop-losses. please. Some would say if you're buying using Bollinger Bands then the mid-line of the BB will work. Is this your approach?

Also, I wonder of you have compared using Donchian Channels against BB's? Some say Donchian break-outs are more profitable, fewer false moves.....

 

[tatrader]

Good post. This approach involves buying into strength, at new highs if necessary. This can be a seriously rewarding approach but it requires even stricter discipline than more conventional approaches.

One thing I am interested in is where you place your stop-losses. please. Some would say if you're buying using Bollinger Bands then the mid-line of the BB will work. Is this your approach?

Also, I wonder of you have compared using Donchian Channels against BB's? Some say Donchian break-outs are more profitable, fewer false moves.....

I really use a strict Money & Risk Management procedure. I'll try to explain it in three steps:

1. First of all, I've decided not to risk more than 2% of my capital in any one trade. So, if my capital is 100000 I don't risk more than 2000 (100000x2%=2000) for each trade.

2. Second, whenever I decide to buy a security, I calculate my Stop Loss. Any reasonable way to calculate the Stop Loss will do. I personally use more than one way of calculating my stop loss. The simplest one would be a recent Low, or Support. I also use a Moving Average, and Parabolic SAR. It's much more important to have a Stop Loss BEFORE you actually trade, than the actual number.

Let's suppose I buy a security at 50 and my stop loss is at 48. That means that I'll sell at a loss of 2 if my trade goes in the wrong direction.

3. The third step is to calculate the number of stock I'm going to buy to keep my risk in control.

As I'm prepared to risk 2000 for each trade (Step 1) and the risk per stock is 2 (Step 2), then I'll buy 1000 shares (2000/2=1000)

Things are a bit more complicated when I want to buy multiple stocks, or when the price of a stock is high compared to my capital.

I've used this approach and it has saved me a lot of trouble. In trading it's always better to err on the safe side.

 

[NVP]

It’s an interesting approach and I use a similar method in forex Trading

Forex trading is even more powerful as it’s a zero sum game

I would recommend ensuring stocks are less correlated ....and bringing more sectors into the mix .....but still applying same criteria

I would recommend using options maybe .....

Stick to bigger capital companies

There’s a company that does this for investment funds so may Be worth looking a to tbeir approach ...it’s free regarding their approach but not the reporting that’s subscriptions based

Saltydog - help to increase my pension, best performing funds and best performing investment sectors

www.saltydoginvestor.com

 

[1nvest]

There’s a company that does this for investment funds so may Be worth looking a to tbeir approach ...it’s free regarding their approach but not the reporting that’s subscriptions based

Saltydog - help to increase my pension, best performing funds and best performing investment sectors

www.saltydoginvestor.com

Interesting, i've been looking at their results and picks closely over the last few months.
I'm interested in anything to do with mutual funds, sad and lonely as i am
i wasnt too impressed. they had a few good wins mainly in the technology sector, where the nasdaq has clearly been storming. they also used a very (relatively) short momentum period. i think it was 3 months, compared with more mainstream momentum advocates of 12 or even an average of 3,6 and 12 months. which would determine which sectors and funds to look at.
their returns vs US is not good. their benchmark is the UK, which is an odd benchmark considering their funds are worldwide. and therefore their returns look good, as the UK is quite frankly the most underperforming index
anyway, just my experience

 

[SkyLarkIII]

@Taftrader - Thanks for sharing your approach. I am curious as to whether you would be willing to share how you are determining Relative Strength of each stock relative to the SP500. Presumably you are running this on excel? If it's secret sauce then not to worry

SkyLark

 

[tatrader]

@Taftrader - Thanks for sharing your approach. I am curious as to whether you would be willing to share how you are determining Relative Strength of each stock relative to the SP500. Presumably you are running this on excel? If it's secret sauce then not to worry

SkyLark

My approach is based on the findings of research that securities that have been strong in the past will likely be strong in the future. Lots of Asset Allocation strategies are based on this well-documented finding.

I can mention Gary Antonacci's "Dual Momentum" explained in his official site https://dualmomentum.net/

I decided to use the same approach but with stocks instead of ETFs he's using.

I measured the momentum of the stocks contained in various Indexes, such as S&P 100, 400, 500 & 600, as well as NASDAQ, and I constructed charts like the one below:

t

Both the long-term and the short-term are a combination of momentums at different time intervals.
I use these charts to choose stocks that have shown a satisfying combination of long- and short-term strength.

I post these charts, as well as some information I find useful, on my site: www.globalactivetrading.com

I'll be glad if you visit the site and tell me what you think. I'll be happy to answer any questions.

Any comments are welcome!

Thanks!

 

[1nvest]

I can mention Gary Antonacci's "Dual Momentum"

My hero! I love Antonacci. his book is a must read for anyone

 

[tatrader]

My hero! I love Antonacci. his book is a must read for anyone

Antonacci uses SPY, ACWI, and the 11 US Sector ETFs to get a return of more than 17% annually.

Now, let's see the chart below:

We can see that the strongest Sector in the chart is XLK, which is in 16th place in the above chart.

In this case, TAN - the Incesco Solar ETF - and SOCL - the Global Social Media ETF - are the most promising ETFs.

I'm using the approach to choose securities taking into account diversification and implementing the strict risk & money management I've described in another reply.

 

[Inquisitor]

I must be missing something here if XLK is the strongest sector can you elaborate as to why?

 

[tatrader]

Good post. This approach involves buying into strength, at new highs if necessary. This can be a seriously rewarding approach but it requires even stricter discipline than more conventional approaches.

One thing I am interested in is where you place your stop-losses. please. Some would say if you're buying using Bollinger Bands then the mid-line of the BB will work. Is this your approach?

Also, I wonder of you have compared using Donchian Channels against BB's? Some say Donchian break-outs are more profitable, fewer false moves.....

I use more than one stop-loss levels. The basic one in Parabolic SAR, but I also use the mid-line of BB. The most important thing is to adjust your exposure to your stop-loss. If, for example, the stop-loss is 2 dollars below price and you've decided that you want to risk, let's say 1000 dollars per trade, then you want to buy 500 shares (1000/2).

 

[tatrader]

I must be missing something here if XLK is the strongest sector can you elaborate as to why?

In the chart above we can see that XLK - the Technology Sector - is the strongest one. The other two Sectors that appear in the chart are XLC - the Communications Sector - and XLY - the Consumers Discretionary Sector right at the end of the chart.

The strongest industry ETFs are the first three ones TAN, PBW, and SOCL that represent Solar Energy, Clean Energy, and Social Media ETFs.

A 'safer' approach would be to limit ourselves to the main Index ETFs like SPY, QQQ, etc. We can then include the 11 US Sector ETFs, XLB, XLC, XLE, XLF, XLH, XLI, XLK, XLP, XLRE, XLU, and XLY.

I expanded the list even further by adding some Industry ETFs and some country ETFs of strong economies.

 

[tatrader]

The strongest stocks in the S&P500

Here we can see that the stocks that are strong long-term and have also positive short-term strength are ALGN and PWR.

Let's look at the charts of these two stocks.

ALGN

PWR

The behavior of PWR in the recent market weakness is much better.

As we can see in the above chart price found support on its 20-day moving average - see the blue circle.

In the lower pane, we can see that the stock's Relative Strength is moving up and above its 20-day moving average - the orange box.

As a trigger for our trade, we want to buy when price moves above the green resistance line at roughly 54.25.

I want to hear your opinion. For me, this approach has worked well till now. It combines strength with basic Technical Analysis.