5 benefits of using relative strength momentum investing that are often overlooked The desire to simply buy stocks, ETFs, or mutual funds and make money from them. Plus the name “relative strength momentum” sounds scary and many people simply don’t understand it.
As I’ve written before, “Avoiding the Mistakes of Relative Strength Investing,” RSM-based analysis takes momentum analysis one step further by performing a comparative analysis of how strong a stock or fund’s momentum is, and if set up properly, can even provide a better understanding of a stock or fund’s momentum. How strong is the fund’s momentum? A specific ETF or fund is compared to other funds. Therefore, this compelling RSM analysis focuses on tickers that are strong and have the potential to not only stay strong but continue to rise; when they falter, the analysis signals a sell.
This is one of the most proven technical analysis methods for finding consistently winning investments.
There are many books on RSM, including Michael J. Carr’s Definitive Guide: Investing Smartly in Any Economy (currently sold out, but hopefully reprinted soon).
RSM is suitable for all types of investments:
- short term
- mutual funds
Even if you are not a technical or mathematical expert, you can implement the formulas that provide the best results, as they are an essential part of ready-made investment software.
Different formulas (all relevant) enable you to decide which way of analyzing RSM provides you with the comparative advantage of a momentum investing approach that suits your goals and personality.
Carr tested seven different relative strength formulas:
- Normalized rate of change (ROC)
- Rear weight ROC
- Pre-weighted ROC
- Price/Moving Average Ratio
- Ratio of Multiple Moving Averages
- average over different time periods
Analyzing investments using alpha or any other RSM method can be easily combined with other buy and sell rules in personal investment software and investment advisor software.
These buying and selling rules include:
- How long to hold position
- Rank to ensure top ranking within your ticker group
You can perform simple technical analysis with or without standard deviation (SD). By adding SD to your analysis, you actually automatically become more conservative.
In fact, you can optimize any RSM calculation (such as alpha) with or without SD to achieve the goal of conservative or moderate or even aggressive investing using the right investing software.
While relative strength momentum investing may sound intimidating, the benefits can lead to long-term growth in your portfolio, especially if you find a personal investing software program that converts your RSM to one that allows you to compare with just a few mouse clicks. Potential Profit and Risk Situations.