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A Trader's Mentality - It's All Relative

Follow us on Twitter @Schwab4Traders. This blog updates the first Tuesday of the month; next installment publishes May 7th. 

During a difficult market day, when red appears all over your trading platform, it can be a challenge to find bullish trading opportunities. Adding to this challenge is the overwhelming influx of opinions, advice and guidance coming from the various media outlets that cover current stock market trends. Whether you realize it or not, this information overload can affect the investment decisions you make.

Don’t misunderstand; news and information is important. However, for many traders, short-term trends can be difficult to trade and have a low probability of success. Stepping back and taking a long view can be helpful.

One approach I use during weak market days is to screen for stocks that have high relative strength. It’s important to note that this indicator is not the same as the Relative Strength Index (RSI), which calculates the strength or weakness of a recent trading period.

What I like about this screening technique is that on the days I’m struggling to find reasons to be positive, I can finds stocks that have outperformed the broader market recently.These stocks might also be weak with a broad market selloff or retreat, but it is likely the stocks that previously led the market higher are going to continue to do so when the market sentiment shifts once again. For trend traders like me, this is exactly what I’m looking for: leaders. 

Relative Strength Screen Criteria

  • Last Trade > $10
  • Last Trade > 200 SMA
  • Average Volume 6-Months > 250K
  • Schwab Equity Rating (SER) A & B
  • Relative Strength > 80
  • RSI 10-Day > RSI 30-Day
     

This screen looks for stocks leading the broad market higher. By trading above their 200-Day Simple Moving Average (SMA), a stock is considered to be in an uptrend by many investors. Combining these criteria should provide a list of up-trending and leading stocks. Consider adjusting the criteria shown, and including additional criteria based on your own considerations to help you be more precise in your screening.

Relative Strength can also be helpful when your current screener provides too many candidates to review and research. For example, if you’re using some basic criteria like the screener below, you might have more than a few hundred stocks to consider. Changing the sort function of the results can help prioritize this list.

Source: schwab.com

There’s always a risk in investing or trading in the market and using a screener like I’ve discussed, and there’s no guarantee of success. However, this approach to screening can provide a list of leading securities with favorable trends for you to consider for further research. 

Join Trader Talk in Today’s Market Daily where the market news, trends of the day and screening ideas are discussed. Bookmark the Schwab Live Daily calendar to stay up-to-date on all Schwab’s offerings.

 

What You Can Do Next

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Important Disclosures 

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Schwab does not recommend the use of technical analysis as a sole means of investment research.              

Past performance is no guarantee of future results.

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