Relative Strength Indicator
Relative strength represents an indicator that assists investors in their stock picking. Additionally, it helps them evaluate the investments they hold relative to other investments.
Relative strength allows investors to gain an understanding of the performance of their stocks as compared to the rest of the market.
Relative Strength Defined
Expressed in percentage, relative strength is a numerical measurement, which shows what portion of the market a particular stock has outperformed. It takes into consideration and is based on the price of the stock. The change in the price of a stock, expressed in percentage, is compared to the market or some of the indexes like S&P 500.
Example: Stock X has a relative strength of 45%. Therefore, it has outperformed 45% of the stocks in the market for a specific time period.
Using Relative Strength When Picking a Stock
It is desirable that the result for the relative strength of a stock is a high number. This is interpreted as the stock having a high performance. Additionally, if the stock sustains this high number over a longer period of time, then this can be interpreted as the company is growing and developing in a positive direction.
Stock screens allow for the use of relative strength when picking a stock. However, you should keep in mind that a value stock that has been overlooked by the market is highly unlikely to come up on the stock screen if you are searching for stocks with high relative strength. Nevertheless, stock screens allow the option of filtering stocks with low relative strength.
You can also use relative strength to determine whether the rise in the price of a stock has occurred recently or the price has been rising for quite a long time. If the price of the stock is rising, it may mean that investors like and trust the stock. Additionally, in many cases it is reasonable to purchase a stock with a rising price.
Finally, relative strength should be only one of the criteria you should apply when you decide on the investment in a stock. You should combine it with other factors in order to make your analysis more reliable.
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