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.
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.
The Trend package includes 2 systems: The Trend and the Trend with Money Flow (Trend w MF). They both use traditional trend indicators and money flow indicators to look for strong stocks in the early stages of a trend.
All systems are available for the Metastock and Amibroker platforms.
This is how the systems performed during the 7 year period from February 2016 to February 2023 .
To produce the test results I used Amibroker Pro with the following test parameters:
Initial trading capital = $150,000.
Trading amount per stock:$15,000
Commissions: $0.01 per share.
Volume filter: Limit position to 5% of trading volume
Entry & Exit next day at the open.
The Relative Strength (RS) system produced two signals for ConocoPhillips (COP) in March and May 2022. In the second time the stock was up 25% during the next 25 days.