If you aren’t paying close attention to this number, you will lose money in 2016, 2017 and beyond…
When it comes to stock trading, it turns out that the key to success really is all “relative.”
Relative price strength—or simply RS—is the metric that I rely on in my Next Week’s Winners service to help me identify stocks with the greatest potential to outperform the rest of the market.
RS, or more specifically, the RS rank, of a stock is an indicator that assigns a numerical score to a stock based on its price performance relative to all other stocks in the market.
The RS rank gives you a great sense of how strong a stock has performed compared to the rest of the market during the past year.
For example, if a stock has a RS rank of 95, that means it outperformed 95% of its peers over the past 52 weeks.
In my experience, this is by far the best indicator for finding stocks that will likely continue to outperform the markets. Why? Because stocks with a high RS rank are actually outperforming the market right now.
The use of RS rank to identify stocks worked exceedingly well in 2015, and that was clearly demonstrated by the gains in the so-called “FANG” stocks, i.e., Facebook (NASDAQ:FB), Amazon.com (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google, now Alphabet (NASDAQ:GOOGL).
Each of these stocks scored in the top 95th percentile or higher in terms of price performance versus all other stocks in the market, and each had stellar performances this year.
A colleague recently asked me if I thought the FANG stocks would continue to lead the market again in 2016…
I told him that I didn’t know for sure if the current market leadership would be the market leadership by this time next year.
What I did tell him I’m certain of is that stocks with strong relative price performance will be the ones leading the market next year, and every year.
One way to think about RS rank is via an analogy to professional sports:
When you’re looking to pick winning teams, do you look at the teams with losing records first and hope they pull off an upset over a team with a winning record?
Or, do you look at teams with strong winning track records and bet on those teams to win based on their relatively better records?
Any good gambler will tell you the odds of success are greater when you bet on teams with a winning record. Sure, you may be the victim of an occasional upset, but most of the time, betting on the team with the better record will net you the best results.
If you want to increase your chances of making winning trades in 2016, it’s time to start thinking “relative” and putting the power of relative strength on your side.