Metastock Part 1: Relative Strength Comparison (RSC) The Key Success Tool In Trading By Stock Market
By David Jenyns
Within this report I'll show you how you can find these profitable trading
opportunities with MetaStock. You'll be able to make use of techniques usually
only used by professional traders, such as the Relative Strength Comparison. The
basis of the RSC (Relative Strength Comparison) is found in sector analysis.
What is Stock Market Sector Analysis?
Stock market sector analysis is a top down stock selection method. Stock
market sectors that are expected to outperform the rest of the market are
identified, through methods such as the Relative Strength Comparison, and then
stocks from those sectors are selected. The idea is that stocks selected from
superior stock market sectors will perform in the same fashion as their sectors.
This follows the principle that money generally flows from under-performing
areas of the market to more profitable areas, a truth that has be tested by many
"My studies have consistently shown that two equally bullish charts will
perform far differently if one is from a bullish sector while the other breakout
is in a bearish group. The favourable chart in the bullish group will often
quickly advance 50 to 75 percent while the equally bullish chart in a bearish
group may struggle to a 5 to 10 percent gain." - Secrets for Profiting in Bull
and Bear Markets, Stan Weinstein, (McGraw-Hill 1992)
How can you use Stock Market Sector Analysis within
To identify stock market sectors that will outperform the market; you must
first compare the strength of each sector against a chosen market index such as
the S&P/ASX200 for the Australian market, or the Straits Times Index for
Singapore. Once you've done this, you must rank the stock market sectors, and
discover which ones are performing the strongest. After the strongest stock
market sectors have been identified, you can see which securities are within the
sectors. These individual securities can also be ranked against their respective
stock market sector, which effectively allows you to single out the best
performing stock market sectors.
The Relative Strength Comparison (RSC) is the best way to compare the
strength of one security against a market index. The RSC compares a security's
price change with that of a "base" or benchmark security.
When plotted on a chart, the RSC line can be interpreted as
An increasing RSC indicates that the security is performing better than the
A RSC that moves sideways indicates that both securities are performing the
A decreasing RSC indicates that the security is performing more poorly than
the base security.
It is important to note that just because the RSC may be rising in value, the
security isn't necessarily rising in value as well. This rise only indicates
that the security is performing better than the base security. For example, a
security may be falling in price, but it may not be falling as fast as the base
security. This would result in a rising RSC. Conversely, if the RSC is falling
the security may not be reducing in value; instead it may be that it's price is
increasing at a slower rate than the base security.
In the second and third sections of this article, you will learn how to use
the various features of Metastock to calculate the RSC, and locate the best
stock market sectors to choose securities from.
About the Author
David Jenyns is recognized as the leading expert when it
comes to MetaStock and designing profitable trading systems.
His MetaStock website offers a huge free collection of trading
related tips and tricks. Gain free access now.
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