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Relative strength

Charting a stock against the market on a P&F chart.

Relative strength compares a stock's performance with a benchmark, such as the S&P 500 or the stock's sector. In classic P&F analysis, relative strength is charted on its own P&F chart, and its signals are read just like price signals.

How it's calculated

Divide the stock's price by the benchmark's price and multiply by 100. Track that number over time. When the stock outperforms the benchmark, the number rises; when it underperforms, the number falls.

Plot the relative strength figure on a P&F chart, typically with percentage-based boxes and a 3-box reversal.

Reading a relative strength chart

• The most recent signal. A relative strength chart on a buy signal (its last signal was a Double Top or better) means the stock has been outperforming over the longer term. On a sell signal, it has been underperforming. These signals change rarely and are meant to be read over months.
• The current column. A column of X's shows the stock outperforming in the shorter term; a column of O's shows it lagging.

Why traders use it

A strong price signal on a stock that is also outperforming the market is a stronger setup than the same signal on a stock that keeps lagging. Relative strength helps you choose the leaders and avoid the laggards when several stocks are giving buy signals at once.

For education only. Nothing here is investment advice or a recommendation to buy or sell any security.