The Relative Strength Of A Stock

Relative strength is basically the measure of the price and its movement in comparison to another stock or industry.

One of the core things you consider when investing in the stock market, is the price at which you purchase stocks. Simply put, if your purchase a stock at the wrong price (maybe at a highly overvalued rate), your investment might not exactly be a profitable one.

One of the ways investors compare stock prices is in relation to other stock prices and this is what “Relative Strength” helps us achieve. Relative strength is basically the measure of the price and its movement in comparison to another stock or industry.

Relative strength here shows how strong or weak one stock is in relation to another. If a stock is found to be stronger in relation to another, then the stock has relative strength and where it is found to be weaker, the stock is said to have relative weakness.

Calculating the relative strength or weakness of a stock is as simple as taking the price of one stock and dividing it by another. So if the price of stock A is N10 and another, stock B is N30, the relative strength of stock A to stock B is 0.33.

So I Know The Relative Strength/ Weakness, Then What?

The first thing relative strength does for you is to help you carry out trend analysis. If you had been computing the relative strength of a stock over time, you will have details of the previous strength or weakness value.

For example, if the strength of stock A to stock B was previously 0.66, you can now try to determine the reason for the reduced strength. Is it that stock A is now undervalued or has stock B become overvalued? Could it be both?

Another way to do it is to compare it to industry benchmarks in a diverse range of industries. Is the stock you want to invest in stronger than the entire market or is it weaker?

For you to successfully make gains from the investing process, you have to buy the stocks that possess relative strength compared to the entire industry they thrive in.

The idea is to find the strength of the stocks before you trade them. Stronger stocks are the ones that will always bounce back regardless of the volatility or risk that comes from the market itself.

Stock traders are known to carry out this analysis on probably a daily basis. While they could make gains from finding those stocks that are showing relative strength and time their entry, the risks of trying to time the market or make swift gains will always exist.

As such, for the investor, this should help in having a broader understanding of the stock you want to invest in as opposed to making quick gains. The idea is to see the growth of your stock, understand its place in its industry and whether it is overvalued or undervalued.

Finally, it is important to note that price is enough reason when determining whether to purchase a stock or not. We will consider this in the next article. Keep investing!

Written by Lawretta Egba