Richard Wyckoff on Relative Strength

When we speak of some of the greatest traders of all time Richard Wychoff is often mentioned along with Jay Gould, Jesse Livermore, J.P. Morgan, Andrew Carnegie, along with many others. Pretty nice company  😉

After analyzing the broad market and establishing a trading bias, Wyckoff turned to individual stock selection and focused on stocks trading in harmony with the broad market trend.

In general, there are four steps in the stock selection process. First, chartists begin by singling out a particular group or sector within the broader market that shows relative strength. Second, look for stocks within this group that are showing relative strength. Third, look for signals using chart patterns and volume. Fourth, calculate risk and reward to ascertain the feasibility of a trade.

Even though the broad market governs the general trend for all stocks, Wyckoff understood that certain groups lead the market and certain groups lag the market. The objective is to find groups showing relative strength when broad market conditions are bullish and relative weakness when broad market conditions are bearish.

Keep in mind that Wyckoff was active in the early 20th century, well before calculators and computers. Everything was done by hand with pencil, paper and eraser.

This is not the time or the place to delve deeply into Wychoff’s methods except to say he looked at the general direction of the markets, then the relative strength of sectors and industry groups, then the relative strength within those sectors and industry groups for buys and short sales.

Ranking the sectors over the last 6 months: