Why Relative Price Strength Is Important

Relative strength measures a stock’s price integrity. It’s a little like knowing that a car you purchase is holding its value over time. People tend to pay a premium for anything that holds or even increases in value, and stocks are no exception.

Stocks with strong relative price strengths also tend to attract the interest of institutional investors, which play the most important role in driving the stock price higher.

Investors Business Daily’s relative price strength rating is user-friendly in that it measures a stock’s relative price change during the last 12 months versus all other stocks. A rating of 80 indicates that 80% of all stocks performed worse in terms of holding their value.

We usually recommend that traders pick stocks that have at least an 80 rating or greater. When the market has experienced a severe correction at which time the relative price strength of most stocks are substantially lower than 80, the most important criteria becomes a company’s proven ability to generate earnings— and more importantly, sustain a track record for earnings growth from one earnings period to another.