The relative strength indicator is one of the most reliable tools of the tech trader. The reason is that it indicates exactly what the procyclical momentum trader wants. Actually every trader and even investors want this – a trade that goes with a heightened probability in the right direction.
Compared with other indicators, like the crossing of two differently time framed moving averages, this indicator is as direct as it could be. Most other magic trading formulas are complex and as such they don’t look at and search for the pure thing. Genial inventions are simple and straightforward. Generally complexity and indirectness are an indicator for not so good designs.
So, looking at the relative strength of a stock compared with an index shows directly what to think of this possible trade. The fine thing about relative strength trading is that in the moment of strength the trader gets also the opposite, a relative cheap entry. Buying at the high, which is a must for velocity traders, has always the problem that a price could be already too high, at least temporarily. The danger of being stopped out just because of a natural swinging of the price increases.
Entering into a position when the market is down assures some snap-back potential. Combining this with waiting for a technical signal like a breakout of a range in the longer trend, the restart, may perfect the relative strength trading setup.
Waiting for the entry signal? Here we have the problem of this entry method. Waiting is never good. Neither for traders nor for their trading. Waiting is more for investors, at least for some time and then, after they have waited long enough, they finally become also traders. Traders who are waiting for entry signals are to some degree investors. Even worse, they are investors without being invested.
Looking in a trend for relative strength needs the market to correct. If there is a trend, the trend trader should try to get in by all means. Waiting for the market dip and gauging relative strength means almost certainly missing a current trend. This trading method is useful only as a speciality system. When the market is already down and trends are hardly showing up, it pays off to look for relative strength and not for trends. Otherwise it is better to take trends as what they are – the best entry situations the market has to offer.
But there is more in it for trend traders. Entering the position during intraday relative strength allows for using a tight stop loss and nonetheless keeping the number of small losses in check. Based on the idea that market fluctuations are mostly random, buying into short-term relative strength like a day trader is a viable entry system for long trend traders. You will still have to wait, but only for hours or days.
The relative strength day trading entry system for long-term trend traders looks like this. Have some – not only one – stocks being in a longer trend, preferably growth stocks that also show a trend with their fundamental data, and watch the market day in, day out for relative strength on the time scale of hours. Buy a stock then on short-term strength and have a tight stop loss limit as if you were a day trader. Some stocks will make it off the launch pad and reach the higher stratospheric layers of your accumulated gain-loss statistic, while the negative side of the balance is still acceptable.