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A Handbook of Technical Analysis: The Practitioner's Comprehensive Guide to Technical Analysis by Mark Andrew Lim

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CHAPTER 24

Relative Strength Analysis

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

  • Understand the significance of relative strength and how it reveals the behavior of one market against another
  • Describe the difference between underperformance and outperformance
  • Identify and differentiate between the ratio and difference method of creating relative strength charts
  • Apply technical studies to relative strength charts effectively
  • Calculate the minimum winning percentage for both linear and non-linear sizing

Relative strength charting is an extremely important technical tool for comparing the performance of one market with another. It also helps the practitioner to effectively forecast potential reversals and breakouts based on a change in percentage performance. In this chapter we shall cover the construction and the application of technical analysis to relative strength charts.

24.1 MEASURING RELATIVE PERFORMANCE

There are numerous ways of studying the relationship between two or more data series, some of which include:

  • Identifying the degree of correlation over a range of data points between two data series
  • Identifying the spread or difference of each corresponding data point between two data series
  • Identifying the ratio of each corresponding data point between two data series
  • Identifying leading and lagging data series
  • Identifying divergence via peaks and trough analysis
  • Comparing the percentage or ratio performance of two or more price ratio charts ...

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