(MT) Metastock Part 2: Relative Strength Comparison (RSC) The
Key Success Tool In Trading By Stock M
In Part 1 of this article, I discussed the importance of sector
analysis, and the use of the Relative Strength Comparison to
identify the best performing securities in the best performing
sectors. In Part 2, I will show you how to use MetaStock to find
these securities.
To create an exploration that uses the RSC you need to first
open a chart of the base index, e.g. S&P/ASX200 for the
Australian market, or the Straits Times Index for Singapore,
that you will be using for the comparison between market
sectors. Once the chart is open, left click on the price plot to
highlight the price information. You`ll know it`s selected when
a series of small dark squares appear on the price plot. It`s
important to note that each time you wish to do an exploration
of this kind, you must first choose your base index.
Next, open the Explorer dialog box and select `new`. Name the
Explorer the `MetaStock Guide Sector Analysis`. Then click
within `Column A` and enter the following formula:
ROC(MOV((C/P),13,S),1,%)
This formula calculates the rate of change, as a percentage, in
the relative strength of the sectors against the base index over
a 13 week period. It may seem complex but let`s break it down
into manageable parts, beginning with the inner-most brackets
first:
C/P is the relative strength (or RSC component) of the tested
sectors vs. the base security.
The way it`s calculated is by dividing the closing price of the
sector, by `P`, where `P` is the base index that you highlighted
before creating this exploration.
(MOV((C/P),13,S) calculates the moving average of the RSC over a
13 week period.
ROC(MOV((C/P),13,S),1,%)calculates the rate of change of the
moving average of the RSC, in other words, the amount the sector
has moved up or down as a percentage.
Looking back at MetaStock, note that you didn`t enter anything
into the filter tab. This is because you only use the filter tab
when you`re looking to remove certain securities from your
exploration results. Since you`re not looking to exclude any
sectors, but to rank all the sectors, you should leave the
filter blank.
Before running this exploration you must check the time period.
To do this click the `Options` button at the bottom of the
`Exploration Edition` dialog box and then select the radio
button marked weekly. Click `OK` twice to return to `the
Explorer` dialog box.
Now you`re ready to run the exploration, so click `Explore`. The
`Select Securities for MetaStock Guide Sector Analysis` dialog
box will appear, and you must select the directory with your
market sectors in it. This directory should be stored with your
other market data and is usually one directory up from your
equities folder. However this can vary, depending on who
supplies your data.
When the market sectors are highlighted, click `OK`. When the
exploration is complete the `Exploration Completed` dialog box
will appear. Click the `Reports` button and to get a summary of
the exploration. The results shown in `Column A` will give you
the rate of change of the relative strength
Tip: By clicking the `Column A` heading you can arrange the
results in ascending or descending order.
What Do these Results Mean?
The results of this exploration are fairly straightforward. A
value greater than zero indicates that market sector is
outperforming the base index. A zero indicates that the market
sector is performing on par with the base index, while a
negative number indicates the market sector is under-performing
the base index.
Remember, a rising RSC value only indicates that the market
sector is outperforming the base Index, it does not necessarily
mean the sector is rising in value. Similarly, if the RSC is
falling; it only indicates that that sector is under-performing
the market index, the market sector may not be loosing value.
Because of this, it is important to open the chart of the market
sectors to analyse the trends.
This information on its own can complement your current trading.
For example, you may decide to only trade securities which are
in top performing sectors. Or, you could take it one step
further and select the top five sectors and use the `MetaStock
Guide Sector Analysis` explorer again. This time, however, you
could compare individual securities against their respective
sectors.
The difference between running this exploration and running the
first one, is that the market index would now become the market
sector chart; and the list of sectors would become the list of
securities that make up the top performing sectors.
By following the same steps as before you could run five
separate explorations and rank the securities against their
respective sectors. The result would identify the top performing
securities within the top five sectors.
The final stage in this top down analysis would be to open all
the charts that have made it to the shortlist. You can whittle
this list down further by eliminating those securities that
aren`t in an up-trend or those that are too thinly traded. In
the end you`d be left with the cream of the crop, between five
and ten securities. These securities will be the best performing
securities in the best performing sectors.
These securities should now be placed on your watch list. I
suggest you don`t race out and buy them. Instead, wait for an
appropriate trigger to enter. This could be based on candlestick
patterns, and/or favourable combinations of other bullish
indicators.
The RSC exploration is a great way to utilise the power within
MetaStock. It can be an extremely effective tool in identifying
profitable trading opportunities. The downside for this type of
exploration is that it is not a complete system on its own and
would need to be combined with other entry, exit and money
management rules. However, you can create a solid trading system
that would benefit greatly from including sector analysis.
David Jenyns, leading expert in designing profitable trading
systems, MetaStock website offers a huge free collection of
trading related tips and tricks. http://www.meta-form
ula.com/subscribe