Find the Strongest Stocks and How to Trade Them

Relative Strength is an important term in trading. It shows which stock (or other asset) is performing better than its peers. Relative strength shouldn’t be confused with the Relative Strength Index, which is a technical indicator.

By monitoring relative strength, a trader can always be trading the best stocks in the strongest sectors, which are likely to produce bigger and more trending moves than a randomly picked stock. Relative strength is not fixed though; what’s relatively strong this month may not be strong next month. Therefore, relative strength trading is especially beneficial to day traders and swing traders who can easily jump from one stock to another when the relative strength strategy calls for it.

Learn more about Swing Trading.

Use Stock Screeners To Find Relatively Strong Stocks

Finviz.com and StockCharts.com both have stock screeners to show which sectors are strongest (and weakest).

On Finviz, click on the “Groups” tab to see how sectors are performing over various time frames. Then jump to the Screener and select the group you want to view. Filter for stocks which have at least 500K in trading volume. View the results by “Performance,” and sort the list by Performance (Week) or Performance (Month) to see top and bottom ranked stocks.

finding strongest stocks
Figure 1. Finding the Strongest Stocks in a Sector – Finviz.com

Pick up to three of these stocks, near the top of the list (strongest) if day trading. These are stocks you’ll look for buy signals in (discussed shortly).

If swing trading, pick up to six (or more) stocks to watch for buy signals in.

Buying works best when the overall market (S&P 500) is in an overall uptrend on the timeframe being traded.

If the S&P 500 is in a downtrend, focus on short selling stocks in the weakest sectors. Look for the weakest sectors, sort by performance and select a few of the weakest stocks on the list. Monitor these stocks for sell signals.

On StockCharts.com, click “Sector Summary” on the homepage. This will produce a sector list; view performance based on the last week or month. Click on the sector to see the top industries within that sector. Click on an industry to see top stocks within the industry. Select several candidates to watch for buy signals in. If looking to go short, pick the weakest sector, weakest industries and the weakest stocks within them.

finding weakest stocks
Figure 2. Finding Weakest Stocks in a Sector – StockCharts.com

Trading Relatively Strong Stocks

Assuming the overall market trend is up, buy stocks which are relatively strong. These stocks already have a lot of buying interest in them. Looking for opportunities in these stocks is a simpler task than trying to analyze all stocks and figure which ones may have buying interest in the future.

Use these three tenants to trade relatively strong stocks:

  1. Watch for a pullback in the S&P 500. Your stock should not pull back as much, relatively speaking.
  2. If the stock starts to rise again after a pullback, buy it. A “trade trigger” will help define an exact entry. Enter long when the price rallies above the high of the most recent pullback bars(preferably these should be small, showing the selling momentum has slowed).
  3. Only trade on the long side if the stock continues to show relative strength (stock continues to make higher highs and higher lows relative to the S&P 500 index). If relative strength disappears, quit trading the stock and find a relatively strong stock.

The following charts show how this works. Figure 3 shows how a stock is analyzed for strength, relative to the S&P 500, or in this case the S&P 500 ETF (SPY). This process determines if the stock is relatively strong or not, and whether you want to be trading it. On this time frame MSI is as strong, or stronger, than the S&P 500 so trading the long side is favorable. At the far right, there is an indication relative strength may be waning.

relative strength on a price chart
Figure 3. Determining Relative Strength Using a Price Chart – FreeStockCharts.com

Figure 4 shows one way long trades could be established in this relatively strong stock, based on the three tenants discussed above.

Trading with Relative Strength
Figure 4. Trading with Relative Strength – FreeStockCharts.com

This trading strategy doesn’t have a defined method for taking profits. It’s suggested profits are taken at a fixed reward:risk ratio. For example, if risking $0.50 on a trade (difference between entry price and stop loss order) placed a target $1 or $1.50 above the entry price. This equates to a 2:1 or 3:1 reward to risk on the trade. This means you won’t trade all the signals on figure 4, since you may still be in a prior trade when a new signal develops.

Learn about the difference between using a Fixed Profit Target vs. Letting Your Profits Run.

Figure 4 shows all valid entries based on the method. The target chosen should not be obstructed by major support or resistance levels. Traders can also implement a trailing stop on positions in an attempt to capture bigger gains when the price trends strongly after an entry.

Pros and Cons of This Trading Strategy

The benefit of this method is that you’re always trading in stocks which are strongly biased in the direction you are trading. These stocks are rising strongly and you’re buying along with it. This means little research and nice potential returns as long as the stock stays relatively strong. The approach can be actively traded on a 1, 5 or 15 minute chart, or search for stocks which are stronger over a longer period of time and take trade signals on a 4-hour or daily chart.

The downside is there is no guarantee what is strong today will be strong tomorrow, or even later today. Relative strength traders must be nimble, dropping one stock in favor of another. This means constantly monitoring the market for which stocks are currently strongest, and also monitoring the stocks you’re trading to make sure they stay relatively strong. While research time is minimal, traders do need to spend time monitoring market conditions and updating their list of potential trade candidates.

The Bottom Line

Relative strength is comparing one asset or stock to its peers. Typically a stock is compared to the S&P 500, as this index is a broad benchmark of performance. The process for selecting relatively strong stocks also assures the stock selected is one of the strongest performers within its sector. Trading a relatively strong stock still requires a strategy, even though the stock is directionally biased in the direction we want to trade. One strategy is to watch for a break above the small bars often created during pullbacks. Use stop loss orders to control risk, and trade the stock as long as it continues to remain relatively strong.

Cory Mitchell