Hello Bill,
There are many ways. Here's Jack's discussion on the subject (from the Yahoo TC2000 site):
Relative Strength"
Often talked about, more often misunderstood.
The question that must first be answered is "relative to
what".
Division is the math tool used to compare one value to another.
If we take the Close of a stock today and divide it by its Close 5
days ago C/C5 we have the momentum indicator known as Price Rate Of
Change or "Price ROC"
This is also the stock's short term "Relative Strength"
as compared to itself 5 days ago
Conventionally when the term Relative Strength is used, without
defining the time period involved, they are talking about C/C250
"The closing price today divided by the closing price 1 year
ago".
A stocks "Relative Strength" as compared to itself I year ago.
Note that this could also be called a I year Price ROC (they are
cousins)
So if we now want to compare the RS of two stocks or a stock and an
Index one "Relative" to the other, division again is employed.
Let C be any stock
Let Cx be any stock or Index that you want to compare C to.
Then we can write (C / C250) / (Cx / Cx250) or it can be expressed as
(C / Cx) / (C250 / Cx250)
They are the same formula expressed differently; in other words they
are equivalent.
The last one, is the formula which Worden Bros. Indicate they use in
TC2000.
I prefer the former, it is more intuitive as to it's purpose and
use.
They ultimately multiply by 100 to express it as a percentage, which
has the effect of producing more detail by bringing forth more
significant figures in the results.
They do not employ a zero line on their graph as some do.
Consequently their graph is purely directional.
The question that may now come up is "On the charts that do
employ a zero line, just what does that represent"?
I have not found any official explanation as to its meaning on the
charts that do have a zero line.
It is quite possible that it indicates the point at which the 1-year
RS of the comparison or base index and the compared Stock are the same
To make it so that the value will be zero when they have the same RS
value we would modify our formula in a certain way.
I'll use the version I prefer.
(C / C250) / (Cx / Cx250)
We will modify it thus:
((C / C250) – (Cx / Cx250)) / (Cx / Cx250)
It can be seen that when C / C250 is equal to Cx / Cx250 we then
have:
0 / (Cx / Cx250) = 0
"Zero divided by any number is zero" (our zero line)
The formula can also be stated as:
((C / C250) / (Cx / Cx250)) –1
This is the same as the former but reduced to a simpler form, which I
prefer.
Again here it can be seen that any time C / C250 is equal to Cx /
Cx250 and since any number divided by itself is 1 we have:
1-1=0 (our zero line)
An artificial mid line imposed on a graph will not represent a zero
line as such.
So we can not see a TC2000 graph with a true zero line.
Note: What I am about to demonstrate is not necessarily going to
coincide with the RS graph in TC2000.
However, it will show how one can use TC2000 to sort in a way that
quite possibly could coincide with a chart that has RS with a zero
line
What we can do is the following.
Write this simple PCF.
(C/C250)*100
Add SP-500 and, or any other Index to a given Watchlist of stocks
that you whish to compare them to.
Update Data and PCFs.
Now sort your given Watchlist by the above PCF, (C/C250)*100
What we know by the previous exercises is:
Whenever it has the same RS ratio value as the comparison, the
compared stock is on the zero line.
When we look at the Watchlist sort we can use the J key to jump to
our index (SP-500).
Any with the same value as our Index are on the zero line any that
are less are below it and any that are greater are above the line.
We could also write it in this way:
((C/C250)-1)*100
This would give the ability to see when any stock on the list was at
or above its price 1-year ago.
If it is above its price 1-year ago it will be a positive number
If it is below its price 1-year ago it will be a negative number
If it is at the same price as 1-year ago it will be 0
Additionally you could then write a PCF that you would have to update
or change each day.
(C/C250)*100 will give you a value for the SP-500 (for example today
it was 80.04)
You then write this PCF:
(C/C250)*100 > 80.04
To sort for those above the line, that day
Or
(C/C250)*100 < 80.04
To sort for those below the line, that day
The value "80.04" would change each day so you would have to
change to the new value each day
Because it could be above the line but moving down you could add:
(C/C250)*100 > 80.04 AND (C/C250)*100 > (C5/C255)*100
This would get those that were above the line and moving up over the
last 5 days
Relative Strength is a good tool, but we need to be sure that we
understand what we are using and just what it is telling us
One should understand for example that just because Relative strength
on a graph is moving up price might not be.
It may be that it is just not going down as fast as the comparison is
going down which would result in a RS graph that is moving up.
One should also note that if something strange happened 1-year ago
(price moved drastically up or down) the resultant RS will be skewed.
Because I want to see actual values I prefer to make my own RS PCFs
I look at several time frames 1-month 3-months 6-months and 1-year.
I set them up side by side on one sort tab so that I can see the
overall RS trend.
I hope this will help in understanding "Relative Strength"
and how it can be used in TC2000
Best regards to all
Jack |
