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