Business, Legal & Accounting Glossary
A stock’s price change over a period of time relative to that of a market index, such as the s&p 500. The relative strength of a stock is calculated by taking the percentage price change of a stock over a set period of time and ranking it on a scale of 1 to 100 against all other stocks on the market, with 1 being the worst and 100 being the best. For example, a stock with a relative strength of 90 has experienced a greater increase in its price over the last year than the price increases experienced by 90% of all other stocks on the market. Some technical analysts, especially momentum investors, like stocks with high relative strength rankings, believing that stocks that have recently gone up are more likely to continue going up. Other technical analysts believe that a very high relative strength can be an indication that the stock is overbought and is ready to fall. Relative strength is really a “rearview mirror” metric, measuring only how the stock has done in the past, not how it will do in the future.
Relative strength is a term associated with technical analysis that helps investors understand the momentum of the stock being analyzed. Relative strength measures a particular stock’s price change over time and compares that change to the change in a stock market index (i.e. the S&P 500). A stock’s relative strength is expressed as a percentage and represents how it performs against other securities. For instance, if a stock has a relative strength of 60, it has outperformed 60 percent of the other stocks over a certain period, typically a year. Some technical analysts prefer stocks with high relative strength because they take them as an indicator of future increases. Other technical analysts view relative strength as an indication that the stock has been overbought and is thus poised to fall. Relative strength is also called price persistence.
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This glossary post was last updated: 5th April, 2022 | 0 Views.