Scanning for Relative Strength
Last updated
Last updated
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Relative Strength scans are commonly used to find stocks that are outperforming their benchmark. These scans are reasonably simple to create. First, choose your benchmark index, then decide how you want to measure relative strength.
When choosing the benchmark index, consider the universe of stocks that you are scanning. If you are scanning securities that are members of a certain index, then it makes sense to use that index as your benchmark. For example, you can scan for Dow Jones Industrial Average component stocks that are doing better than the Dow Jones Industrial Average by using said average as the benchmark index.
However, you don't have to use an index and its members. For example, the NASDAQ 100 ETF (QQQ) would be well-suited as a benchmark for large-cap technology stocks, even though the NASDAQ 100 is not exclusively made up of tech stocks. Similarly, $TSX is often used as a benchmark for the entire Toronto Stock Exchange, even though the index does not cover 100% of stocks traded on that exchange.
In this example, we're going to compare the performance of S&P 500 members with the performance of the S&P 500 Index ($SPX).
The Rate of Change (ROC) indicator is frequently used to measure relative strength, but other momentum indicators can be used too. For example, some chartists prefer to use the Relative Strength Index (RSI), looking for stocks with an RSI value higher than the benchmark. You can also use the PctChange() function or simple multiplication to calculate momentum.
Learn More. | | Percent Change Scans
In this example, we'll compare the ROC values for three different timeframes (5-day, 10-day, and 20-day) against the benchmark.
To begin with, you will need to get the benchmark's current value for your chosen relative strength measurement. Depending on the measurement you chose, you can do this by running a quick scan or just looking at a chart for the benchmark.
Here is an example of a scan that will tell you the 5-day ROC value for $SPX:
The scan looks for symbols that are $SPX (so the results will be limited to just the benchmark symbol we are looking for). The RANK BY clause displays the ROC(5) value for the symbol in the scan results.
However, in our example, we need to find three different values: the 5-day, 10-day and 20-day ROC for $SPX. In this case, it might be easier to build a SharpChart that shows all three values at once, like this:
Click here for a live version of the chart.
The chart above shows the S&P 500 with three different rates of change: 5-day, 10-day, and 20-day. The benchmark $SPX is up 2.46% over the last 5 days, 2.83% in the previous 10 days, and 0.43% over the last 20 days. Stocks with a higher Rate of Change over the corresponding periods show relative strength. Those with a lower Rate of Change show relative weakness.
Cool Tip. If you plan to use your relative strength scan again, save this chart to a ChartList. You can quickly call it up to get the latest ROC values whenever you want to run the scan.
Once we've got the current ROC values for the benchmark, we can build a scan using those numbers:
The first line limits our results to S&P 500 member stocks. The other lines require that the stock's 5-day, 10-day and 20-day ROC values are all higher than the corresponding values we found for $SPX.
Notice that we plugged in the exact $SPX numbers we found on the chart; you may (or may not) wish to enter a higher number. For example, you might choose to require ROC(5) to be greater than 3, rather than 2.46, so that your scan results have an ROC(5) value that is significantly higher than the benchmark.
Even though we are requiring stocks to outperform the benchmark over all three time periods, we still have quite a few scan results:
Other criteria can be added to further narrow the results. For example, users could look for stocks with oversold conditions, an upturn in MACD or a CCI buy signal. In this example, we added CCI Buy Signal criteria from the Predefined Scans dropdown menu in the Advanced Scan Workbench, which significantly reduced the results:
Once you're happy with your scan, be sure to save it so that you can use it again in the future.
Since we manually entered the benchmark values for our three ROC measurements in the scan, they won't be updated automatically as $SPX changes over time. Each time you run the scan, you'll need to determine the current values for the three ROC measurements and plug them in to the scan. If you saved your chart to a ChartList earlier, it will be easy for you to call up the chart and get the new values.
Relative Strength is a great way to scan for stocks that are outperforming their benchmark. The values for the benchmark do need to be changed manually each time you run the scan, but a combination of saved scans and saved charts make this quick and easy to do.
