Trading Strategy: Buy Relative Strength

An alternative way to profit from an uptrend is to buy into the strongest of the strong, without waiting for a dip or retracement. In this case, the steps are –

• establish that the market is going up
• check that the sector is going up
• the particular financial security is going up
• check the strength relative to other securities
• calculate trade size and stoploss
• enter trade long
• exit trade if failed or on profit

The difference from the previous strategy is that you do not wait for dip, but you do check that the security you are interested in is behaving strongly. For instance, this can be established by checking that the performance is better than the market by at least 10%, and better than the sector by at least 1% over the past week or two, and you can substitute your own levels by backtesting.

You can exit this trade on a protective stop set below the lowest level for the past few days, or if in profits you can set a trailing stop, or exit if the security falters and fails to outperform the market for a couple of weeks.

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