How to Use Relative Strength (RS) to Find Stock Market Winners
Relative Strength (RS) is a crucial metric used in technical analysis to gauge a stock's performance against the broader market. Often confused with the Relative Strength Index (RSI), RS offers a distinct perspective on a stock's relative strength. In this article, we'll delve into the concept of RS, its calculation, and its implications for trading strategies.
What Is Relative Strength (RS)?
Relative Strength (RS) is like the stock market’s report card—it tells you how well a stock is performing compared to the rest of the market. If you've ever wondered whether you’re betting on the right stock, RS can give you the answer. RS ranks stocks based on their percentage price change over the past year. The higher the RS score, the better the stock has performed compared to others.
Why Should You Care About RS?
Think of RS as a cheat code for finding winning stocks. Stocks with a high RS—typically over 80—are seen as outperformers. By focusing on these, you can increase your chances of picking stocks that are already on the rise, and avoid sinking your money into ones that are lagging behind. Let’s break down how RS works and why you should use it to level up your investing game.
Story 1: The RS Rookie
Alex, a beginner investor, was excited to start his stock market journey. After some research, he came across the concept of Relative Strength (RS). Eager to test this strategy, he identified a tech company with an RS of 85. It seemed promising, so he invested $5,000 at $50 per share. Six months later, the stock price had climbed to $65, and Alex's investment grew to $6,500, netting him a cool $1,500 in profit. Alex felt on top of the world, knowing he had picked a winner by using RS!
Story 2: The RS Veteran
Sarah, on the other hand, was a seasoned investor. She had been through market ups and downs and knew when to make a move. One of her long-term holdings, a pharmaceutical stock, had a declining RS of 70. Trusting her strategy, Sarah sold her 100 shares at $80, bagging a profit of $2,000. With that cash, she bought into a tech company with an RS of 92. Over the next year, her investment in this growth stock saw the share price rise to $150, netting her another $1,500. Sarah's success lay in using RS to spot both when to sell and when to reinvest smartly.
Step-by-Step Guide to Using Relative Strength (RS)
1. Gather Your Data
First things first—you’ll need the stock’s current price and its price from one year ago. This data is widely available on finance websites or stock apps.
2. Calculate the Percentage Change
The magic of RS lies in the percentage price change. Use this formula:
This tells you how much the stock has gained or lost over the past year. For instance, if a stock was $50 last year and is now $65, it has gone up by 30%.
3. Rank the Stocks
Next, line up all the stocks you're analyzing by their percentage changes, from the biggest winners to the biggest losers. Stocks at the top are the outperformers; those at the bottom are the underperformers.
4. Calculate the RS
RS is the stock’s percentile rank in this list. For example, if a stock ranks in the top 90%, it has an RS of 90. A high RS means the stock is performing better than most others in the market.
How RS Helps You Invest Smarter
1. Spot the Winners
An RS of 80 or above means that the stock is a top performer. This is your signal that it’s worth a closer look. Stocks with high RS values have momentum and might keep climbing, especially in strong sectors.
2. Find Hot Sectors
Sometimes it's not just about individual stocks but entire sectors. If tech stocks, for example, are showing high RS values, it might be a sign that the entire sector is thriving. Focus on stocks in these high-performing sectors for even better results.
3. Combine RS with Other Strategies
RS works well when paired with other strategies like moving averages or support and resistance levels. Think of it as adding an extra layer of confidence to your investment decisions.
The IBD® 85-85 Index
Ever heard of the IBD® 85-85 Index? It’s a list of stocks that have an RS of over 85. Investors love this index because it highlights some of the best performers in the market. If you’re unsure where to start, this index can offer solid guidance on which stocks might be worth your attention.
Steps to Check RS Value on Our Website
Step 1:
Go to our website: www.freebsensetips.com
Step 2:
Use the search bar in the top-right corner to search for the stock you want to analyze. Type in the stock ticker and hit the search button.
Step 3:
From the search results, select the stock you're looking for.
Step 4:
On the stock page, you will see the RS (Relative Strength) value for that stock.
💡 Pro Tip:
If the RS value is above 80, it’s generally a good sign for the stock’s performance. So, if you’re using any buying strategy from our scanner and a stock appears, make sure to check its RS value on our website. If it’s over 80, that’s your green light!
Conclusion: Take Action and Invest Smarter with RS
Relative Strength is more than just a number—it’s a tool that can help you make smarter investment decisions. Whether you’re a newbie like Alex or a veteran like Sarah, using RS can increase your chances of picking stocks that outperform the market. By calculating RS, you can identify winners, avoid losers, and invest with more confidence. Ready to start? Gather your data, crunch the numbers, and let RS guide your next big investment move!