Advanced Relative Strength Concepts

In the previous chapter, we introduced the concept of relative strength (RS)—providing its definition and a basic interpretation of an RS chart as it pertains to a particular stock. The overriding theme was to demonstrate to you the robustness and adaptability of RS and how this simplistic tool enables you to capture the large winning trades while helping you to avoid the big losers. As you have learned, RS places you in the venues where outperformance exists, while steering you away from areas of underperformance. In this chapter, we will show you how RS can be used in many different applications, not just as it pertains to individual stocks, and that these other applications provide great insights into where best to allocate your investment dollars.

The beauty of RS lies in its lack of complexity—it is a simple calculation of division, comparing one security or index to another. Because of this simple equation, the concept of RS can be applied across the entire spectrum of financial products. In essence, anything that has a price associated with it can be used in an RS calculation. Although this sounds quite basic, it doesn't diminish its effectiveness in determining outperformance. In sum, RS can help to answer broad asset class allocation questions related to capitalization, style, fixed income, sector rotation, and even international exposure. Equally, RS permits you to pinpoint whether Pepsi (PEP) is a better choice over Coca-Cola ...

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