Relative price strength (RPS) is a strategy used in technical analysis in identifying value stocks. RPS is also known as relative strength.
In relative strength strategy, market participants compare the price trend of a stock in comparison to the price trend of the market or other stocks. In other words, they compare performance of two securities, or a security and an index, to show relative performance to each other.
They basically try to find out how a stock’s price is acting in relation to the market and all other stocks.
Relative price strength strategy helps you to eliminate mediocre performing companies that can hold back performance of your investment.
Relative strength strategy focuses on investing in stocks or other investments that have performed well relative to the market as a whole or to a relevant benchmark.
For instance if banking stocks are out performing overall index, then a relative strength investor might prefer to look at banking stocks for investment. These investors assume that the present trend of outperformance will continue.
A intraday trader uses this in order to evaluate the performance of a stock. Relative price strength helps a trader to know how a stock has performed in comparison to the market, an index or a stock.
The rule of relative price strength strategy is to buy high and sell even higher.
They even compare stocks in order to see which company within the market has outperformed their peers by comparing price movement with their peers.
Basically it’s a tool to help you find good trade candidates for your trading. A trader by using Relative price strength strategy can focus on relatively strong stocks for buying strategy and selling or shorting relatively weak stocks.
When the major market is moving up due to a particular sector, it can be profitable to trade in those stocks or sectors that are showing more significant gain or helping the market in moving up.
Likewise, when the market is moving down, by applying the same strategy, you might be interested in the stocks or sector which are showing more significant losses or moving the market down.
The simple rule followed in the Relative price strength strategy is “Short the weakest stocks, and go long on the strongest”.
Going short or shorting a stock means you are borrowing and selling the stock with a hope that the price will fall further so that you can purchase it at a lower price to return it back to the stock broker.
Going long means you are purchasing a stock to sell it at a higher price to make a profit.
