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How to Use Relative Strength in Your Swing Trade Selection

Relative strength is how the price performance of one asset compares to another. For example, it is comparing the performance of one stock to another stock or index. Or, comparing one currency pair to another. Relative strength shows us which asset is performing better or worse. It can be a key tool in trade selection. For example, you may find five good trade candidates, but only have enough capital to trade one or two. You can use relative strength to make your final determination on which one or two are likely the best to trade.

Relative strength shouldn’t be confused with the relative strength index (RSI), which is a technical indicator that compares current prices to prior prices in a single asset.

Understanding Relative Strength

Relative strength tells us whether one asset is stronger or weaker than another asset or index. Strength will fluctuate over time. Relative strength is calculated by taking the price of one asset and dividing it by another. This creates a ratio, and the value is recalculated each day, or at the completion of each price bar if using a different time frame. If the ratio rises, it means the first asset is getting stronger. If the ratio falls, it means the second asset is getting stronger.

relative strength example on daily chart

This is a daily chart of Apple Inc. (AAPL), with the price of APPL shown as the green and red candles. For comparison, the S&P 500 stock index is also shown on the chart as an orange line. The right scale shows the percentage the asset has risen or fallen over the time period.

The chart shows one year’s worth of price data. On the left, we can see that AAPL was stronger, as it rose above the S&P 500. At the bottom of the chart, the Comparative Relative Strength (CRS) indicator shows that AAPL is moving up slightly compared to the S&P 500.

In November and December AAPL fell a lot more than the S&P 500 did. During this time, the CRS falls, reflecting the underperformance of AAPL. Note how much further AAPL in percentage terms on the right scale.

In February through April the CRS begins to rise, showing that AAPL is moving up more than the S&P 500. This can be a little confusing since APPL is still well below the S&P 500 on the chart. Notice the distance between AAPL and the S&P 500 in January, and how it narrows by April. APPL had dropped a whole lot more than the S&P 500, but it performed strongly during this period to almost catch up to the S&P. This is saying that from January to April you would have been better off owning AAPL than the S&P 500 because it rose more (look at the percentage on the right) during that period.

It’s important to note that just because relative strength is increasing doesn’t mean the asset is increasing in price. In November and December, APPL fell more than the S&P 500. That means that the S&P 500 was comparatively strong. Yet it too was falling! It was just falling less than AAPL.

Applying Relative Strength to Your Charts

Before you can effectively use relative strength in your analysis (discussed next), you need to be able to apply it to your chart and play around with it.

While each charting platform is different, you can likely apply relatives strength to your chart by finding an indicator or typing the symbols you want to compare in a certain way.

On TradingView.com charts, you can search for relative strength indicator. I like Comparative Relative Strength. Once the indicator is applied to the chart, click on the settings for it, and input the symbols you want to compare. I typically use the stock I am interested in, and then an index, like the S&P 500 or the SPDR S&P 500 ETF (SPY).

comparative relative strength indicator settings

On a platform like StockCharts.com, it’s a bit different. In the stock window, you can simply input AAPL:SPY for example, or whatever two symbols you want to compare, separated by a “:”.

stockcharts.com comparison of two securities

That will bring up relative strength right on the chart you are viewing.

If you want to see relative strength as an indicator below a chart, you can do that as well. Scroll down to Indicators. Select Price. In the Parameters, input AAPL:SPY, or whatever two symbols you want to compare. Now you can view your normal price chart, plus have the relative strength indicator below it.

relative strength shown as an indicator on stockcharts.com

Remember, the first stock is the directional stock when dealing with relative strength. If the relative strength is rising it means the first stock is rising more than the second. If the relative strength is falling it means the first stock is getting weaker relative to the second (second is stronger).

How to Use Relative Strength

Using relative strength is relatively straightforward in terms of helping with trade selection. If you are buying a stock, ideally it should be showing relative strength to its industry and the stock market as a whole.

For example, if you are interested in two telecommunications companies, you can compare them using relative strength and pick the stronger one.

Or, if you are interested in stock in different sectors, but can only pick one, you could then compare the industry groups. Pick the one in the stronger industry. Ideally, for a long position, you want to buy strong stocks in strong industries.

Ultimately, relative strength is just a tool to help filter out the best buy candidates. If you are looking to take a short position, you want to short stocks that are relatively weak compared to other stocks or to their industry/index. Ideally, the industry you are shorting is also weak compared to other industries.

StockCharts.com has a list of industry groups so you can compare stocks to specific industries if you want, or compare different industries to each other via the same method mentioned above.

By Cory Mitchell, CMT