A Simple Trading Strategy using Relative Strength

In this video, Stuart McPhee talks about a simple trading strategy using a concept called relative strength that can be applied to stocks, forex and futures markets over any time frame. He starts talking about sector analysis, which means finding the best performing sectors or industry groups. This is a trading strategy which is widely used by many people over many years. The concept of relative strength is measuring the performance of one thing against another. So when you think at sector analysis, you can take a group of industries which have an index that represents the value of all of those and compare this group over one benchmark which would normally be the generally market index.

By conducting a very simple scan using the concept of relative strength the result will be a very short list of all those industries against a benchmark and you can rank them after their performance. This task is very easy because there are many software tools that can be used. Once you identified the best performing sectors you can go into those top sectors and extend them and actually conduct an analyse of all that stocks in that sectors. It does not matter how you trade or what methodology you adopt, you can do this over any time frame you wish. Stuart says that you may have two stock charts pretty much identical. But if one comes from a very strong performing sector and the other one from not so a very performing sector you must put your money into the one that comes from the strong sector. This is a powerful concept, a very strong strategy for identifying the best performing stocks within the best performing sectors.

Stuart McPhee runs software that describes this concept. You can see how this concept running. You see a chart of an index. One of the indicators of that software is relative strength. If you apply it to the chart you can compare the financial sector with another index or with another item. Then a line appears which represents the relationship between the financial sector and the general market sector. If the line is moving up, the financial sector is out-performing the item that you are comparing it to.
This is a very simple concept. If the line is moving down, then the financial sector is under-performing the item that you are comparing it to. Using the software you are able to do a scan using this concept. Stuart McPhee runs a scan over twelve industry sectors within a market and he compares each of those to the general market. The result is a list of those twelve sectors ranked by their values. So he now has a list of the best performing sectors over the last three months in this case. The best performing sector over these three months was the Information Technology Sector. Of course, this analysis can be conducted over any time frame.

Using the same scan you can see the best performing stocks within that particular Information Technology sectors. Running the software you get a list of the best performing stocks ranked by value. This is a very simple introduction to the idea of relative strength and how you can use that to identify the changes and the ways that things are moving around the market, see the best performing sectors and the lowest performing sectors. Once you identify the best performing sectors you can apply this concept and identify the best performing stocks and now you can see why this strategy is so used.

Stuart McPhee quotes from this video:

  • This is a powerful concept, a very strong strategy for identifying the best performing stocks within the best performing sectors.
Submitted by YouTube Trader on Fri, 04/09/2010 - 22:23

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