Relative Strength


DEFINITION of 'Relative Strength'

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.

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