The relative strength (RS) method is a popular and useful tool for comparing one investment against the overall market. But few individuals ever manage to use this technique effectively, because they fail to incorporate RS into a comprehensive trading strategy. I used the relative strength concept to developed two strategies: RS for stocks and RS for Exchange traded funds (ETF).

The traditional Relative Strength indicator has a number of deficiencies the most important being that its interpretation is only visible and indicator values are meaningless. To develop the RS systems I used the custom RSMK indicator ,which builds on the traditional RS indicator but improves on this important impediment, producing values according to the stock’s relative strength thus making it more useful in trading system design.

BUY THE DIPS (BTD)

This system is similar to the Relative Strength (RS) for stocks. The difference between the two systems is that the RS system looks for stocks that outperform the market whereas the BTD looks for strong stocks in an uptrend and triggers a buy signal during a temporary correction or dip. The basic premise of this system is that a strong growth stock which experiences a small correction will continue an established uptrend. You can see a comparison of both systems at the bottom of the page.

All systems are available for the Metastock and Amibroker platforms.

SYSTEM PERFORMANCE

RS Performance

This is how the systems performed during the 10 year period from 08/2/2010 to 08/2/2020 on the SP-500 component stocks.

To produce the test results I used Amibroker Pro with the following test parameters:
Initial trading capital = $200,000
Max. Open positions: 15
Commissions: $0.01 per share
Volume filter: Limit position to 10% of trading volume
Entry & Exit next day at the open.

RS EQUITY

RS EQUITY