Foundations of Relative Strength

This chapter describes the concept of relative strength (RS), which is an important tool for portfolio construction. It has been stated that RS allows an investor to catch the positive outliers or big winners while helping to avoid large losers. It has been found that RS is the most robust and adaptable methods of security analysis. Despite it truly being a very simplistic concept, RS has been proven time and time again to be a viable methodology for outperforming the market over time. This is the essence of RS—a way to measure outperformance. It is concluded that relative strength has no bias, it tells an investor unemotionally what is really happening. By making RS a key component to the stock evaluation process, investors can increase odds of success.