If you want to day trade, you may encounter the confusion in choosing the best stocks or forex pairs for your day trade. You have various stocks in different sectors and industries as well as various forex pairs to choose. The available solution is to find the best asset to day trade with relative strength.
The Definition of Relative Strength (and Weakness)
First of all, relative strength is different from the relative strength index, so it is not an indicator. Instead, relative strength compares the performance of an asset to the performance of other assets.
For instance, there are two oil stocks that are rallying, one is up 2% today and the other is only up 1%. The former stocks are stronger. It shows relative strength compares to the other stocks.
Similar to that if the EUR/USD is up 2% today, while the GBP/USD is up 1, then the GBP is stronger than the EUR.
Ways to Use the Relative Strength
If you want to trade with this relative strength or weakness, you have to pay attention to these things.
During the uptrend (when major market indices are going up), trade sectors and stocks that show the biggest gains. These stocks, have the clearest moving direction, thus they become the most attractive for day traders.
On the other hand, during the downtrend (when major stock indices are going down), trade the sectors and stocks with biggest losses. These stocks also have the clearest moving direction.
However, to use relative strength in your trading you need to have a trading strategy. You cannot randomly buy a strong stock.
You also need to always stick to your trading plan. The plan will help you find the way and place to enter the trade, control the risk, as well as your position size and the way to control your trading risk.
Relative strength only offers you favorable assets for your trading strategy. Trending trading strategies work best with this approach since relative strength shows the strong movement of an asset.
