Relative Strength

What is 'Relative Strength'

Relative strength is a momentum investing technique that compares the performance of a stock, exchange-traded fund or mutual fund to that of the overall market. Relative strength calculates which investments are the strongest performers, compared to the overall market, and recommends those investments for purchase. Relative strength is a "buy high, sell higher" strategy that assumes a stock whose price has been rising will continue its upward trajectory.

BREAKING DOWN 'Relative Strength'

Relative strength investing has both an entry and exit strategy; investors using this technique aim to sell their holdings as soon as they begin to appear weak. An investing technique in its own right, relative strength can also be applied to more complex strategies such as pairs trading.





There is more than one way to calculate an investment's relative strength. One method is to rank all investments within the same investment universe and purchase the top performers. Another is to take the six-month rate of change in an investment's price and divide it by the six-month rate of change in a relevant index. The investment's rate of change is divided by the benchmark's rate of change to get a relative strength value. If the value is greater than one, the investment is relatively strong; if the value is less than one, the investment is relatively weak.



RELATED TERMS
  1. Index Investing

    A form of passive investing that aims to generate the same rate ...
  2. Market Perform

    An investment rating used by analysts when the expectation for ...
  3. Investment Fund

    A supply of capital belonging to numerous investors that is used ...
  4. Investing

    The act of committing money or capital to an endeavor with the ...
  5. Debt Fund

    An investment pool, such as a mutual fund or exchange-traded ...
  6. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment ...
Related Articles
  1. ETFs & Mutual Funds

    Buy High And Sell Low With Relative Strength

    The RS strategy seems counterintuitive, but there is evidence to show that it works.
  2. ETFs & Mutual Funds

    3 Strategies for Trading Mutual Funds

    Learn some of the most commonly used investment strategies employed by mutual fund managers or that can be employed by individual mutual fund investors.
  3. Trading

    Value Investing + Relative Strength = Higher Returns

    Buying value stocks that are moving higher helps investors steer clear of value traps.
  4. Trading

    How To Best Analyze Relative Strength

    Relative strength indicators measure performance between similar instruments, uncovering opportunities that can translate into reliable profits.
  5. Investing

    Value Investing: Common Alternatives To Value Investing

    There are dramatic differences in the ways different types of investors make their investment decisions. In this section, we'll look at some of the most common investment philosophies and see ...
  6. ETFs & Mutual Funds

    The Benefits of Picking Mutual Funds Over Individual Stocks

    Learn about the advantages of investing in mutual funds rather than individual stocks, including the benefits of affordability, oversight and diversification.
  7. Managing Wealth

    Dollar Cost Averaging

    Discover how this investing technique can lessen the risk of investing a large amount of money in a single investment.
  8. Trading

    4 Steps To Creating A Better Investment Strategy

    Make your trading safer and more streamlined by following these simple guidelines.
  9. Investing

    Calculating The Gain Or Loss On An Investment

    Calculating the percentage of change in an investment is easy. Take the amount the investment gains and divide it by the amount invested.
  10. ETFs & Mutual Funds

    How to Rate Your Mutual Fund Manager

    What to really look for when you're deciding on a mutual fund.
RELATED FAQS
  1. What are some of the limitations of only looking at the rate of return for an investment?

    Learn why only reviewing the rate of return for an investment poses a risk to the investor and what additional factors should ... Read Answer >>
  2. What is relative strength?

    Relative strength is a measure of the price trend of a stock or other financial instrument compared to another stock, instrument ... Read Answer >>
  3. How are blue-chip stocks similar to mutual funds and exchange-traded funds (ETFs)?

    Understand the primary differences between making investments in blue-chip stocks, mutual funds and exchange-traded funds ... Read Answer >>
  4. How do I calculate the loan-to-value ratio using Excel?

    Learn what a mutual fund and a money market fund are, and understand the differences between each and how they serve various ... Read Answer >>
  5. What investments have been the poorest historical performers?

    Learn about low performance investments and how they are used by investors. Find out which investments lose funds and how ... Read Answer >>
  6. What information does the SEC require in an investment company's prospectus?

    Understand the lengthy list of required information that investment companies such as mutual funds must include in a prospectus ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center