How to use the Relative Strength Line feature image

How To Use The Relative Strength Line To Find The Best True Market Leaders

The relative strength line tells you how strong a stock is relative to every other stock on the market. It is a time-tested technical analysis indicator that has been effective for decades–its longevity means it can be trusted and used with confidence and conviction. The relative strength line is often associated with the RS Rating 1-99, however this article focuses on the RS Line itself.

Relative Strength Line Calculation

The calculation is simple; it is the price of the stock divided by the price of the S&P 500 at that time. Though deceivingly uncomplicated, the relative strength line is undoubtedly the key to finding the best-performing true market leaders, especially when the market is in a correction. For easy step-by-step instructions to plot the relative strength line on different platforms, use this guide

80-90% of all new stock bases are formed while the market is in correction. The relative strength line is one of the most efficient and effective tools to find the strongest stocks among thousands to sort through.

Relative Strength Line Examples

Let’s take a look at ELF and TSLA, two of our biggest winners from 2020. It was the RS line that put our eyes on these two stocks super early on. The charts below illustrate the functionality of this fairly simple indicator.

elf rsblog

The point of the two charts above is to show you just how far in advance of a huge move to the upside a true market leader will start to exhibit massive relative strength. This gives us more than enough time to begin building a position early on in the base-building process, which in turn makes managing risk much easier.

Relative Strength Line Considerations

Once you have found a name with an excellent relative strength line, it is important to remember that spotting clear, early relative strength like in the examples above is just the beginning of the process of finding a true market leader.

Next, I consider price and volume action. We must see healthy, constructive price and volume action accompany the early signs of strength in the stock. 

Finally and most importantly, I consider all of the CANSLIM fundamentals. Never forget, the fundamentals are critical. The relative strength line alone will not get you very far.

However, with the relative strength line as your starting point and a skillful sequence of productive tools and techniques, you will be able to identify the most powerful and high-quality stocks, early on in the process with confidence.

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Frequently Asked Questions

The Relative Strength Line is calculated by dividing the price of a stock by the price of the S&P 500 at a given time.

80-90% of all new stock bases are formed while the market is in correction, making it a crucial time to utilize the Relative Strength Line to find true market leaders.

The Relative Strength Line helps identify true market leaders by showing their strength relative to other stocks, especially during market corrections. This enables investors to find the best-performing stocks early in their base-building process.

During market corrections, the Relative Strength Line can be a valuable tool for identifying stocks that continue to perform well relative to the overall market, indicating their potential as true market leaders once the correction ends.

The Relative Strength Line compares a stock's performance to the overall market, while the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements within a specific range, typically between 0 and 100.

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