Find The Relative Rate Of Change Of Using The Formula Relative Strength Comparison (RSC) The Key Success Tool In Trading-Part 3

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Relative Strength Comparison (RSC) The Key Success Tool In Trading-Part 3

To create an exploration using RSC you must first open a chart of the underlying index, for example the S&P/ASX200 for the Australian market, or the Straits Times Index for Singapore, which you will use for comparison between market sectors. With the chart open, left-click on the price plot to highlight the price information. You’ll know it’s selected when a series of small dark squares appear on the price plot. It is important to note that every time you want to do this type of exploration, you must first choose your base index.

Next, open the Explorer dialog box and select ‘New’ and name the Explorer ‘MetaStock Guide Sector Analysis’. Then click inside ‘Column A’ and enter the following formula:

ROC(MOV((C/P),13,S),1,%)

This formula calculates the rate of change as a percentage in the relative strength of sectors against the base index over a 13-week period. This may sound complicated but let’s break it down into manageable chunks, starting with the inner-most parentheses:

C/P is the relative strength (or RSC component) of the tested areas versus the base protection.

The way to calculate this is by dividing the closing price of the sector by `P`, where `P` is the base index that you highlighted before creating this exploration.

(MOV((C/P),13,S) calculates the moving average of RSC over a 13-week period.

ROC(MOV((C/P),13,S),1,%) calculates the rate of change of the RSC’s moving average, in other words, the amount the area has moved up or down as a percentage.

Looking back at MetaStock, note that you didn’t enter anything in the Filters tab. This is because you only use the Filter tab when you are looking to remove certain securities from your search results. You don’t want to exclude any fields, but to rank all fields, you should leave the filter blank.

You should check the time period before running this search. To do this click on the ‘Options’ button at the bottom of the ‘Exploration Edition’ dialog box and then select the radio button marked Weekly. Click `OK’ twice to return to the ‘Explorer’ dialog box.

Now you are ready to run the exploration, so click on ‘Explore’. The ‘Select Securities for MetaStock Guide Sector Analysis’ dialog box will appear, and you should select the directory containing your market sectors in it. This directory should be stored with your other market data and is usually a directory from your Equity folder. This may vary, however, depending on who supplies your data.

When the market areas are highlighted, click “OK”. When the exploration is complete the ‘Exploration Completed’ dialog box will appear. Click the ‘Reports’ button to get a summary of the findings. The results shown in “Column A” will give you the rate of change of relative strength

Tip: You can sort the results in ascending or descending order by clicking on the `Column A’ heading.

What do these results mean?

The results of this exploration are quite straightforward. A value above zero indicates that the market sector is outperforming the underlying index. A zero indicates that the market sector is performing on par with the underlying index, while a negative number indicates that the market sector is underperforming the underlying index.

Remember, a rising RSC value only indicates that the market sector is outperforming the underlying index, it does not mean that the sector is increasing in value. Similarly, if the RSC is decreasing; It only indicates that the sector is underperforming the market index, the market sector may not be losing value. For this reason, it is important to open a chart of market areas to analyze the trend.

This information itself can complement your current business. For example, you may decide to only trade securities in the top performing sectors. Or, you can take it a step further and select the top five sectors and again use the “MetaStock Guide Sector Analysis” explorer. This time, however, you can compare individual securities with their respective sectors.

The difference between this exploration run and the first run is that the market index will now become a market area chart. And the list of sectors will become the list of securities that make up the top performing sectors.

By following the same steps as before you can run five separate searches and rank securities against their respective sectors. The results will identify the top performing securities in the top five sectors.

The last step in this top down analysis is to open all the charts that made it to the short list. You can narrow this list down even further by removing securities that are not up-trending or are trading too thinly. In the end you will be left with the cream of the crop between five and ten securities. These securities will be the best performing securities in the best performing sectors.

These securities should now be on your watch list. I suggest you don’t run out and buy them. Instead, wait to enter an appropriate trigger. This can be based on candlestick patterns, and/or a favorable combination of other bullish indicators.

RSC Exploration is a great way to use the power within MetaStock. It can be an extremely effective tool for identifying profitable business opportunities. The downside of this type of exploration is that it is not a complete system by itself and needs to be combined with other entry, exit and money management rules. However, you can create a solid trading system that will have many benefits including field analysis.

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