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#1
11th July 2004, 11:35 AM
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External Relative Strength
Relative Strength
Relative Strength is a measure of price trend that indicates how a stock is performing relative to other stocks in its industry. It is calculated dividing the price performance of a stock by the price performance of an appropriate index for the same time period. This is superior to comparing a security to an index since most indexes are weighted by market cap or price. Momentum investing is directed at identifying stocks using strong relative stock price action vis a vis the NSE 500 or some other index or against an industry group. Changes in relative strength are extremely important. If a stock has underperformed for a long period, but then turns up against the SPX, it can signal a reversal and a long potential period of outperformance. Conversely, an outperforming stock, which shows short term relative price weakness can be indicating a top and trend reversal. Relative strength can be calculated for any time period. Momentum investors should look at multiple time periods to assess relative price strength. For instance, a momentum investor would look at one year, six month, one month, one week and one-day relative strength. If this seems obsessive and overdone, and computer intensive, then choose another style of investing. In essence, we look for crossovers where increases or decreases in relative price action signal a move in one direction or another. A momentum investor will use trendlines of relative price strength to signal breakouts, breakdowns, and reversals. You can read more about Relative Strength and view the latest Relative Strength ranking for the most active Indian stocks at http://www.tradersedgeindia.com/exte...e_strength.htm 
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