Relative strength: When prices of an individual stock or industry change, it is difficult to tell if the change is stock specific or caused by market movements. If two variables are changing at the same rate, the ratio created by dividing one of the variables by the other will remain constant. This is called the relative strength ratio.
Relative Strength = Stock Price / Market Price
- If the ratio increases over time the stock is out-performing the market (a + trend)
- If the ratio declines over time the stock is under-performing the market (a – trend).
