CHAPTER 9
RS System No. 1
Originally presented in October 2000, this is a short-term relative strength (RS)
system that compares the stock price with its underlying market index, but also
looks for confirmation from volume. The first step is to calculate the relative
strength of the stock compared to the market as a whole, then take the percentage
difference between the relative strength curve and its five-day moving average. A
value above one (the higher the better) indicates the stock has moved stronger than
the market as a whole.
The second step is to calculate the percentage difference between the on-
balance-volume indicator and its five-day moving average. A value above one (the
higher the better) indicates the volume fueling the move is above its five-day
moving average and that the market has a short-term interest in the stock.
The final step is to multiply both the percentage differences to create a
volume-weighted relative-strength curve. A value above one (the higher the better)
indicates that the market has a short-term interest in the stock, but also that it is
doing better than average in terms of the overall market. (Or, if the interest is low,
the stock is still moving strongly enough to warrant a trade, and vice versa.)
Suggested Markets
Stocks, stock index futures, and index shares (SPDRs, DIAs, QQQs).
Original Rules
Enter long at the close when the volume-weighted relative-strength curve crosses
above one.
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