Relative strength is an integral part of our portfolio management strategy at Mullooly Asset Management. To put it plainly, relative strength allows us to compare investments. It’s our way of sizing up stocks, bonds, mutual funds, ETFs, and even asset classes. We can compare these investments to one another or to broad market indices. When something has strong relative strength it signifies outperformance. Relative strength is also referred to as the momentum factor. One way to interpret relative strength is via the point and figure chart. Our friends at Dorsey Wright and Associates have taught us a great deal about point and figure relative strength charts.
How Do We Calculate Relative Strength?
It all revolves around a simple math equation:
Security A’s Closing Price/Security B’s Closing Price X 100 = Relative Strength Reading for Security A
– Take the closing prices of the securities you wish to compare
– Divide them by each other and multiply by 100
– This provides you with Security A’s relative strength reading when compared to Security B
We multiply by 100 to give us an easier number to plot on a point and figure chart.
Tim walks through an example of how we calculate relative strength in this video! Make sure to watch. Be on the lookout for our next video where we plot relative strength readings onto a point and figure chart!