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Saeed Ebrahimijam Spring 2012-2013

Doğu Akdeniz Üniversitesi. Faculty of Business and Economics Department of Banking and Finance. Fundamentals of Technical Analysis and Algorithmic Trading Chapter 9 : Relative Strength Analysis. Saeed Ebrahimijam Spring 2012-2013 . FINA417. Contents. Top-Down Analysis

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Saeed Ebrahimijam Spring 2012-2013

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  1. DoğuAkdenizÜniversitesi Faculty of Business and Economics Department of Banking and Finance Fundamentals of Technical Analysis and Algorithmic TradingChapter 9 : Relative Strength Analysis SaeedEbrahimijam Spring 2012-2013 FINA417

  2. Contents • Top-Down Analysis • Sectors and Industry Groups • Using Relative Strength between Stocks • Some evidence from different markets Fundamental of Technical Analysis and Algorithmic Trading

  3. What is RSA? • relative strength analysis and its particular importance in choosing the right sectors and industry groups. - The same holds true for mutual funds themselves. • Relative strength analysis adds an important dimension to market analysis by telling us: how one fund is performing relative to the rest of the market or how it’s performance compares to other fund competitors in the same category. Fundamental of Technical Analysis and Algorithmic Trading

  4. Relative strength analysis is an easy concept to understand. • It simply compares the performance of one item (such as a stock) with another item (such as an industry group). • The objective is to determine whether the first item’s price is advancing or declining faster than the second item’s price. In other words, is the first item outperforming or underperforming the second item on a relative basis? • Relative strength analysis is normally used to compare an industry group’s performance to the overall market or a particular stock’s performance toits industry group. • However, it can also be used to compare virtually any two items as long as they have prices (such as two stocks, two commodities, two industry groups, etc.). Fundamental of Technical Analysis and Algorithmic Trading

  5. INDUSTRY GROUP VERSUS A MARKET INDEX • Technicians compare industry groups to the market as a whole using relative strength analysis to determine which industry groups are outperforming or underperforming the overall market. • A ranking of the various industry groups can be made according to their relative strength. • Those industry groups with the highest rankings are candidates for buying; • whereas those with low rankings represent stocks that have the potential for selling or short sales. Fundamental of Technical Analysis and Algorithmic Trading

  6. Figure 9-1 compares the electrical equipment industry group to the S&P 500 index. Note that the industry’s relative strength rose throughout most of the time period shown. Therefore, it was outperforming the market. • Figure 9-2 demonstrates an industry group (restaurant) with declining relative strength when compared to the S&P 500 index. Thus, it was underperforming the market as a whole for the time period shown. Fundamental of Technical Analysis and Algorithmic Trading

  7. Fundamental of Technical Analysis and Algorithmic Trading

  8. Fundamental of Technical Analysis and Algorithmic Trading

  9. INDIVIDUAL STOCK VERSUS AN INDUSTRY GROUP • In a fashion similar to comparing an industry group to the overall market, a technician can use relative strength analysis to compare an individual stock’s price performance to that of the industry to which it belongs. Fundamental of Technical Analysis and Algorithmic Trading

  10. Fundamental of Technical Analysis and Algorithmic Trading

  11. Measuring Relative Strength methods • Percentage Change Method • Alpha Method • Trend Slope Method • Levy Method Fundamental of Technical Analysis and Algorithmic Trading

  12. Fundamental of Technical Analysis and Algorithmic Trading

  13. The Steps of Technical Analyzing 1- Choosing the appropriate chart and period. 2- Analyzing Market Index Trend 3- Analyzing the top 50 companies in the market Index. ( or industry which the security is between them.) 4- Look at the Price trend for short-term, mid-term, long–term Horizons. 5- Find the Support and Resistance lines and Gaps in the trend. 6- Use technical analysis tools (patterns and indicators) to find the best time to buy or sell. Fundamental of Technical Analysis and Algorithmic Trading

  14. EXAMPLES OF HOW SELECTED PROFESSIONALS SCREEN FOR FAVORABLE STOCKS • The William O'Neil CANSLIM Method • James P. O'Shaughnessy Method • Charles D. Kirkpatrick Method • Value Line Method • Richard D. Wyckoff Method Fundamental of Technical Analysis and Algorithmic Trading

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