When you have multiple choices, Relative Strength can help you decide which stocks will outperform the rest.
Relative Strength Technique
Relative strength is a technique that invests in stocks that have performed better than the rest of the stocks in that category. Relative strength is based on momentum investing and assumes that stocks that are trending strongly will continue to do so in the future.
Outperformance through Relative Strength
Combined with Market Awareness and Buy/Sell Signals, Relative Strength provides an edge in stock selection leading to outperformance. You can first filter stocks based on their relative strength and then use market awareness charts and buy/sell signals to buy or sell at the optimum time.
Relative strength can be used to select single stocks & bonds and even market or sector etfs.
Relative strength is calculated based on the past performance of stocks being compared over a fixed period. The most common time period used is 200 days, which is about 40 weeks of trading.
Relative Strength Chart
In the chart below you can see the relative strength of the various sector etfs over the last 200 days. Based on this you can see that Technology has outperformed the rest of the sectors. Assuming this trend will continue, it would be better to invest in technology stocks or the technology sector etf. You can further use the relative strength charts to select stocks from the technology sector that are likely to outperform their cohorts.
Note: This chart uses the S&P 500 as its baseline when comparing the performance of all the sectors.
Tool to Chart Relative Strength
The simplest way to chart relative strength is to use the free charts on https://stockcharts.com Select the PerfChart from the drop-down, and then enter the stock symbols you would like to compare.