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(MT) Metastock Part 2: Relative Strength Comparison (RSC) The Key Success Tool In Trading By Stock M

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 ... read more

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<A 
href="http://www.systemtradingblog.com/oct-29-metastock-part-1-relative-strength-comparison-rsc-the-key-success-tool-in-trading-by-stock-market-sectors/">In 
Part 1 of this article</A>, 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.

Author Bio:

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