(MT) Metastock Part 2: Relative Strength Comparison (RSC) The Key Success Tool In Trading By Stock M
By David Jenyns
In
Part 1 of this article, I discussed the importance of sector analysis, and
the use of the Relative Strength Comparison to identify the best performing
securities in the best performing sectors. In Part 2, I will show you how to use
MetaStock to find these securities.
To create an exploration that uses the RSC you need to first open a chart of
the base index, e.g. S&P/ASX200 for the Australian market, or the Straits
Times Index for Singapore, that you will be using for the comparison between
market sectors. Once the chart is open, left click on the price plot to
highlight the price information. You'll know it's selected when a series of
small dark squares appear on the price plot. It's important to note that each
time you wish to do an exploration of this kind, you must first choose your base
index.
Next, open the Explorer dialog box and select 'new'. Name the Explorer the
'MetaStock Guide Sector Analysis'. Then click within 'Column A' and enter the
following formula:
ROC(MOV((C/P),13,S),1,%)
This formula calculates the rate of change, as a percentage, in the relative
strength of the sectors against the base index over a 13 week period. It may
seem complex but let's break it down into manageable parts, beginning with the
inner-most brackets first:
C/P is the relative strength (or RSC component) of the tested sectors vs. the
base security.
The way it's calculated is by dividing the closing price of the sector, by
'P', where 'P' is the base index that you highlighted before creating this
exploration.
(MOV((C/P),13,S) calculates the moving average of the RSC over a 13 week
period.
ROC(MOV((C/P),13,S),1,%)calculates the rate of change of the moving average
of the RSC, in other words, the amount the sector has moved up or down as a
percentage.
Looking back at MetaStock, note that you didn't enter anything into the
filter tab. This is because you only use the filter tab when you're looking to
remove certain securities from your exploration results. Since you're not
looking to exclude any sectors, but to rank all the sectors, you should leave
the filter blank.
Before running this exploration you must check the time period. To do this
click the 'Options' button at the bottom of the 'Exploration Edition' dialog box
and then select the radio button marked weekly. Click 'OK' twice to return to
'the Explorer' dialog box.
Now you're ready to run the exploration, so click 'Explore'. The 'Select
Securities for MetaStock Guide Sector Analysis' dialog box will appear, and you
must select the directory with your market sectors in it. This directory should
be stored with your other market data and is usually one directory up from your
equities folder. However this can vary, depending on who supplies your data.
When the market sectors are highlighted, click 'OK'. When the exploration is
complete the 'Exploration Completed' dialog box will appear. Click the 'Reports'
button and to get a summary of the exploration. The results shown in 'Column A'
will give you the rate of change of the relative strength
Tip: By clicking the 'Column A' heading you can arrange the results in
ascending or descending order.
What Do these Results Mean?
The results of this exploration are fairly straightforward. A value greater
than zero indicates that market sector is outperforming the base index. A zero
indicates that the market sector is performing on par with the base index, while
a negative number indicates the market sector is under-performing the base
index.
Remember, a rising RSC value only indicates that the market sector is
outperforming the base Index, it does not necessarily mean the sector is rising
in value. Similarly, if the RSC is falling; it only indicates that that sector
is under-performing the market index, the market sector may not be loosing
value. Because of this, it is important to open the chart of the market sectors
to analyse the trends.
This information on its own can complement your current trading. For example,
you may decide to only trade securities which are in top performing sectors. Or,
you could take it one step further and select the top five sectors and use the
'MetaStock Guide Sector Analysis' explorer again. This time, however, you could
compare individual securities against their respective sectors.
The difference between running this exploration and running the first one, is
that the market index would now become the market sector chart; and the list of
sectors would become the list of securities that make up the top performing
sectors.
By following the same steps as before you could run five separate
explorations and rank the securities against their respective sectors. The
result would identify the top performing securities within the top five sectors.
The final stage in this top down analysis would be to open all the charts
that have made it to the shortlist. You can whittle this list down further by
eliminating those securities that aren't in an up-trend or those that are too
thinly traded. In the end you'd be left with the cream of the crop, between five
and ten securities. These securities will be the best performing securities in
the best performing sectors.
These securities should now be placed on your watch list. I suggest you don't
race out and buy them. Instead, wait for an appropriate trigger to enter. This
could be based on candlestick patterns, and/or favourable combinations of other
bullish indicators.
The RSC exploration is a great way to utilise the power within MetaStock. It
can be an extremely effective tool in identifying profitable trading
opportunities. The downside for this type of exploration is that it is not a
complete system on its own and would need to be combined with other entry, exit
and money management rules. However, you can create a solid trading system that
would benefit greatly from including sector analysis.
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. Click Here ==> http://www.meta-formula.com/subscribe -=-=-==-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-
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