ETF Range Projections 1.27.12
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Relative Strength – A Different Look
Most traders and investors are familiar with the concept of relative strength. Very simply relative strength measures the relative performance of one security against another, or as is more common measured against a major market average such as the S&P 500 or the NYSE index. A potential problem exits however, and that is you’re measuring against two moving targets that may be moving in opposite directions.
What if we measured relative strength against a fixed rate of return instead of an index that is also moving? Now when we look at the rate of change, i.e. 3 month or 6 month relative strength (either measurement) we now generate a zero line. Your instrument must now be above the zero line to be able to say that it is outperforming that index or that fixed rate of return.
Here is a look at DBC Power Shares Commodity Tracking fund with a 6 month relative strength as measured against the NYSE index and measured against a fixed rate of return (click picture to enlarge)
Is it a better or worse measurement? That will greatly depend upon you, your trading style and acumen, goals, and trading psyche.
Members: Go to Monday’s Trading Notes: More Relative Strength Back Testing for back tests against each ETF in our sample ETF asset allocation portfolio and an overall portfolio back test. Back test criteria is simple if the relative strength crosses into positive territory buy tomorrow on the open. If it cross into negative territory sell tomorrow on the open and move to cash. You may be very surprised at what you find.