Relative Strength Analysis
price Confirmation
When using relative strength charts to signal potential reversals or breakouts in
the security, price confirmation is required. This is because any bullish or bearish
indications are merely signals and are not representative of actual price movement
in the main security that is being traded. Price confirmation is usually in the form
of price breaching some significant price barrier, such as support or resistance,
as well as some popular overlay indicators such as trendlines, channels, piece
envelopes, volatility bands, chart patterns, Ichimoku clouds, Fibonacci projection
levels, and so on.Characteristics of relative Strength Lines
The action of relative strength on the chart is referred to as a relative strength line,
that is, RS line. The RS line is usually a form of constant‐time charting where each
new RS point or bar is plotted at some regular interval. But this is not always the
case, as RS data may also be plotted as Point and Figure charts, which represent
constant‐range charting.
It should be noted that RS lines will adopt the volatility characteristics of both
underlying data series, and as a consequence, RS lines tend to be much more vola-
tile. Many practitioners therefore employ various trend identifiers to help indicate
the trend of RS lines. Popular trend identifiers include:■ (^) Trendlines
■ (^) Simple moving averages
■ (^) Double and triple moving average crossovers
■ (^) Linear regression lines
Moving averages are by far the most popular form of trend identification.
Moving averages help smooth out volatile RS action, rendering the trend more
obvious. The amount of smoothing may be adjusted by:
■ (^) Changing the lookback period of the moving average, where larger periodici-
ties provide greater smoothing action
■ (^) Changing the sensitivity by selecting the most appropriate weighting factor
whether it is exponential, linearly weighted, triangular, simple, and so on
■ (^) Changing the price data structure from closing, typical, or midway to weight-
ed close prices
■ (^) Using double or triple smoothing on the original RS line
Instead of smoothing single moving averages, practitioners also use double or
triple moving average crossovers to signal the start and end points of uptrends and
downtrends. Practitioners tend to avoid using crossovers between a single moving
average and the RS line, as volatility in the RS line would generate an inordinate
number of whipsaws. Double or triple crossovers have the advantage of generating
less erratic signals as compared to crossovers between the RS line and its simple
moving average. Finally, many practitioners also employ crossovers between the RS