Use Relative Strength to Find the Best Day Trades

Relative strength helps you pick a trade when there's more than one option

relative strength chart
Monitor the performance of multiple symbols on one chart. FreeStockCharts.com

It happens all the time; you have a bunch of similar trades, but you want to pick the best one. Relative strength can help. In the stock market, an entire sector or industry may be rallying, and you want to get involved. Which stock do you buy, of the potentially hundreds in that sector? Or if a sector is weak, and you want to trade on the short side...what stock do you pick?

The same questions occur in correlated forex pairs.

Maybe there is a long trade setting up in the GBP/CHF and EUR/CHF. These are likely to be similar trades, but which one is better? (Think Forex is Confusing? Here's What You Need to Know)

Relative strength is one method for making these decisions. 

What's Relative Strength (and Weakness)?

No, it's not an indicator. Don't confuse relative strength with the RSI (relative strength index).

Relative strength is comparing how one asset is performing in relation to another. If two oil stocks are both rallying, but one is up 2% today and the other is only up 1%, the former is stronger. It is showing relative strength compared to the other stock.

If the EUR/USD is up 1% today, and GBP/USD is up 0.5%, then the EUR is stronger than the GBP, and is showing relative strength. For additional insight, see Best Time to Day Trade the EURUSD.

Relative weakness works the same way. If the Financial Sector ETF (XLF) is down 3%, while the Energy Sector ETF (XLE) is only down 1%, then Financials are relatively weak compared to Energy.

How to Use Relative Strength

There are a few basic guidelines for day trading using relative strength or weakness.

  • During uptrend days (when the major market indexes are moving up), you want to be trading in sectors and stocks which are showing the biggest gains. These stocks are moving the most in a clear direction, and therefore the most attractive for day trading (depending on strategy).
  • During downtrend days (when the market indexes are moving down), you want to be trading in the sectors and stocks which are showing the biggest losses. These stocks are moving the most in a clear direction, and therefore the most attractive for day trading (depending on strategy).
  • You want to short the weakest stocks and go long the long strongest (see: What do Long, Short, Bullish and Bearish Mean?).

Trading with relative strength still requires a strategy. Don't randomly buy a strong stock. You still need to follow a trading plan, which defines how/where you will enter, how you will control risk, what your position size is and how you will exit. Relative strength simply lets you know some favorable assets to execute your strategy in.

Since relative strength is about strong movement, trending trading strategies typically work best with this approach.

Finding the Best and Worst and Performers

On Fiviz.com, click the "Groups" tab. It'll show which sectors are performing the best/worst today, and across various time frames. You can then use the screener to see which stocks within those groups are performing the best and worst. Sign up for the Elite service for real-time alerts and movers.

Alternatively, on the home page, note the Top Gainers and Top losers. These are stocks which are the strongest and weakest compared to all other stocks. Sometimes this is simply due to a large price gap at the open though; therefore, intra-day the stock may not trend in the direction implied by its percentage performance. 

If you have a group of stocks, currency pairs or ETFs you follow on a regular basis, you can plug up to six of them into FreeStockCharts.com, and monitor them all at the same time. Quickly see which of the six are performing the best/worst.

To do this, input one of the stocks/currency pairs/ETFs in the main symbol box. Then, click "Settings" and select "Comparison." Input 5 more symbols. Give them distinct colors so you can differentiate them. Also, select "Show percent scale." Using percentages makes it much easier to compare one asset to another, since assets may have very different prices.

The attached chart shows an example.

Final Word

Relative strength is not a strategy in and of itself. It is a tool to help you find good trade candidates for your already tested and established trading strategy. Focus on buying relatively strong stocks with your strategy, and selling/shorting relatively weak stocks with your strategy.

What is strong or weak now, may not be an hour from now. Monitoring relative strength is a constant task, but can be lucrative since the trader who masters it will always be trading in stocks and sectors which are moving the most, seeing the biggest gains (for longs) and losses (for shorts). 

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