Relative Strength Explained



Relative strength (RS) is a valuable tool for screening the market for profitable spread betting opportunities.



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As I have noted several times on this website, successful financial spread betting is about stacking the odds in your favour. Increase your odds on every spread bet and you are bound to come out tops over the longer term.

On way of increasing the odds of success is to only trade in the direction implied by a stock or sectors relative strength measure. So, if a stock or sector is strong, your spread betting bias should be to the long side. By the same token, where a stock or sector is showing relative weakness, you should focus your spread betting in such a stock or sector on short positions.

What is RS?

This simple but effective tool measures the strength of underlying prices movements in a stock or sector relative to the wider market. So, for instance, you can calculate the returns on the Banking sector index against the returns on the FTSE 100 index to derive a measure of the strength of the banking sector relative to the wider market. This provides valuable insight that can help you deliver outstanding performance in your financial spread betting.

Let me demonstrate this with a practical spread bet example.

Say you are trying to initiate a new spread betting position. So, you have determined the outlook for the Footsie and established that the market is in a strong uptrend. Next, you measure the RS for all the sectors within the Footsie and rank them from strongest to weakest. Now you can pull the trigger at this level by placing a buy bet on the sectors showing the strongest RS and place short bets on those stock market sectors showing the weakest relative strength. This will ensure that you are long the sectors that are outperforming the market and short the ones that are underperforming. This is exactly what the pro spread better wants to be doing.

Alternatively, you can drill down one step further. In this case, you do another layer of analysis. Here, you simply compare individual stocks to the specific industry group or sector that they are in. This has direct spread betting benefit. Essentially, you only want to buy stocks or shares that are particularly strong in relation to their sector. Conversely, for those stocks that are showing relative weakness, you spread bets will be focused only on short positions.

While all this is very simple once you get the hang of it, the relative strength approach that I have described here is indeed very powerful. It is a methodical approach to stock market analysis that is used by highly profitable hedge fund traders and pro financial spread betters alike.

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