Relative Strength Comparison (RSC) A Key Tool for Trade Success, Part 3

To create an exploration that uses RSC, you need to first open a base index chart, such as the S&P / ASX200 for the Australian market or the Straits Times index for Singapore, which you will use to compare between market sectors. Once the chart opens, left-click on the price section to highlight the price information. You will learn that it is selected when a series of small dark squares appear on the price chart. It is important to note that whenever you want to conduct such a study, you must first choose a base index.

Next, open the Explorer dialog box and select “new” Name Explorer “MetaStock Management Sector Analysis”. Then click in “Column A” and enter the following formula:

ROC (MOV (C / P), 13, S), 1%)

This formula calculates the rate of change in the percentage of relative strength of sectors compared to the base index over a 13-week period. This may seem complicated, but let’s break it down into manageable parts, starting with the innermost brackets:

C / P is the relative strength (or RSC component) of the sectors tested compared to baseline security.

It is calculated by dividing the closing price of a sector by “P”, where “P” is the base index you selected before creating this study.

(MOV (C / P), 13, S) calculates a moving average RSC for a period of 13 weeks.

ROC (MOV (C / P), 13, S), 1,%) calculates the rate of change of the moving average RSC, in other words, the amount of movement of the sector up or down as a percentage.

Looking back at MetaStock, note that you did not enter anything on the filter tab. This is because you use the filter tab only if you want to remove certain securities from the research results. Since you do not want to exclude any sectors, but rank all sectors, you must leave the filter blank.

You should check the time period before running this study. To do this, click the “Options” button at the bottom of the “Exploration Edition” dialog box, and then select the check box selected weekly. Click “OK” twice to return to the “Explorer” dialog box.

You are now ready to run the study, so click “Explore”. The `Selecting Securities for MetaStock Guide Sector Analysis` dialog box appears and you need to select a directory with your market sectors in it. This directory should be stored along with your other market data and is usually one directory above your stock folder. However, this may vary depending on who is supplying your data.

When market sectors are highlighted, click “OK”. When the study is complete, the “Research Complete” dialog box appears. Click the “Reports” button to get a summary of the study. The results shown in “Column A” will give you the rate of change of relative strength

Tip: by clicking on the heading `Column A`, you can arrange the results in ascending or descending order.

What do these results mean?

The results of this study are quite simple. A value greater than zero indicates that the market sector exceeds the base index. Zero indicates that the market sector is level with the base index, while a negative number indicates that the market sector is not performing the base index.

Remember, the rise in the value of the RSC only indicates that the market sector is outperforming the base index, this does not necessarily mean that the sector is rising in price. Similarly, when RSC falls; it only indicates that this sector is underperforming the market index, the market sector may not lose value. Because of this, it is important to open a chart of market sectors to analyze trends.

This information alone can complement your current trade. For example, you may decide to trade only securities that are in the most successful sectors. Or you can go one step further and select the top five sectors and take advantage of the `MetaStock Guide Sector Analysis` researcher again. However, this time you can compare individual securities with the relevant sectors.

The difference between running this study and launching the first is that the market index will now become a market sector chart; and the list of sectors will become the list of securities that make up the most efficient sectors.

By following the same steps as before, you can conduct five separate surveys and rank securities by relevant sectors. As a result, securities with the best performance in the five largest sectors will be identified.

The last step of this top-down analysis will be the discovery of all the charts shortlisted. You can further narrow this list by excluding those securities that are not in an uptrend trend, or those that are trading too little. Eventually you will be left with the cream of the harvest, five to ten securities. These securities will be the most efficient securities in the most efficient sectors.

Now these securities need to be included in your watch list. I suggest you don’t run around and buy them. Instead, wait for the appropriate trigger to enter. This may be based on candlestick patterns and / or favorable combinations of other bullish indicators.

RSC exploration is a great way to harness the power of MetaStock. This can be an extremely effective tool in determining profitable trading opportunities. The disadvantage of this type of research is that it is not a complete system in itself, and it needs to be combined with other rules of entry, exit and money management. However, you can create a robust trading system that would benefit greatly from the inclusion of sector analysis.