Yes, we have been talking a lot about fundamentals in the past lessons and how we can use them to up our stock market and equity index trading game. Now it is time talk about some additional tools for the chart technician. We are all chart technicians; we as an online trading academy love the charts and there are a few ways on how to become better at charting when it comes to stocks. We will be introducing those in this module.
One of the ways, we want to look at stocks is using relative or comparative strength. Comparative strength allows us to be trading stocks that have been doing better than the index, and other stocks. And therefore, they are likely to continue to be outperforming. Makes a lot of sense right to be buying the strongest as opposed to the average or the weakest stocks.
We have already learned how to pick the strongest stocks based on the underlying fundamentals, based on a value analysis.
But how does this really relate to the charts? how can we spot if a company has been doing better than the average?
In this lesson we will show you.
Lesson 1: Comparative Strength
Comparative strength is when we compare two stocks, or a stock with an index, and we find that one has been comparatively stronger than the other. When we look at comparative strength and for buying, most important in this analysis are the lows, and how well they are holding up when stocks become under pressure.
Now there are two arguments. Argument number one is: We want to buy the stock or the index that has been hit or suffered the most, therefore, it is the cheapest and has the most upside potential. This is the more common argument, one that most retail investors follow. Buying chunk just because it has been beat up and its low.
The second argument, and the one we will be following is to buy the ones that are comparatively the strongest, the ones that have held up the best in a correction or stock market drawdown. And as you probably already know without me going into the detail, which ones were those companies after the corona crisis that performed the best?
Yes, the winners of this pandemic, Apple, Microsoft, Tesla, Google, Netflix. All those companies held their prior lows when the indices made new lows. And what those companies have done in terms of stock performance is history. But what a great learning on taking advantage when markets sell off.
The great thing about comparative strength is that it is a very universal strategy. It also works when we look for selling, we want to sell the ones that are in the weakest hands. And it also applies to all our markets within certain futures groups. For example, when looking at the precious metals group we can compare the markets we want to buy and choose the ones that are in the strongest hands.
Lesson 2: When to apply this Chart Analysis Strategy
When it comes to stocks, this works best when the entire market is selling off. And we would only buy them once we get a buy signal in the market. What a buy signal looks like is a little more complex and something you will learn in this lesson. It happens rarely, but when it does, we need to take advantage of it. And how: We buy the comparatively strongest stocks in the basket.