Configuring a relative strength investment strategy to produce profitable investment results requires more than simply picking a method and plugging in typical, common settings. Results that produce safe investing with regular profits, regular gains, requires settings that meet the needs of the group and your objectives.
Three keys to establishing and using relative strength investing include:
- Type of Relative Strength analysis
- Objectives of the Investments
- Testing and Setting
Type of Relative Strength
There are different types of relative strength momentum analysis (RSM) and these are often more suited to one type of investment or objective. For example, are your objectives aggressive or conservative or somewhere in-between; short-term or long-term; and are you investing from a group of stocks, ETFs or mutual funds.
Aggressiveness
Generally speaking an analysis based upon Alpha (a type of RSM) is more aggressive than one based upon the normal relative strength momentum, return or price oscillation. Yet, if you add Standard Deviation (SD) to Alpha so you have an Alpha/SD analysis the result is a conservative to moderate analysis strategy.
Aggressiveness, however, doesn't always produce the best results.
My testing has shown the best results are usually based on the type of the group from which you choose to invest:
for Mutual Funds:
alpha
alpha-C
rsm
alpha/sd
for ETFs:
rsm/sd
rsm
alpha
alpha-c
for stocks:
rsm
rsm/sd
alpha
alpha-C
Objectives
If your objective is conservative or moderate growth with minimal risk to your money, then an investment strategy method of analysis that also uses standard deviation coupled with a market exit signal will give you adequate growth while protecting you when the market declines.
Testing and Settings
How you test or back-test your groups of ticker symbols and different types of analysis is critical.
If you are more aggressive and willing to trade frequently, almost daily versus weekly or occasionally then you will want to test with shorter time periods. Shorter time periods will give you signals for every twist and turn of the markets and your holdings but result in frequent trading that may or may not produce greater gains than more moderate trading based on weekly or monthly analysis.
Using your investment software and back testing you can find strategies based upon gains coupled with drawdown (losses) that meet your goals.
For example:
An Alpha 10 strategy is based on analysis of 10 trading days on a continual basis will pick up every up and down as compared to an Alpha 60 based on analysis of 60 trading days (on a continual basis) which averages out the ups and down and so results in less frequent trading.
A relative strength momentum analysis set with a fast 10 and slow 30 will act like the Alpha 10 whereas settings of a fast 40 and slow 90 would be somewhat similar to the Alpha 60. (note that results between Alpha and RSM will be different because of how the different analysis themselves are computed).
Other factors in your strategy settings than also effect the results besides just the type of analysis. These include:
- Desired frequency of analysis - daily, weekly or monthly
- Desired minimum hold periods indicating your preference for how long you want to keep a position as a minimum
- Stops - are you going to set stops to force selling a position should it drop too much
The point is, just saying you are going to use relative strength investing is good, but only the beginning. Just as the same size shoe doesn't fit everyone, nor does the same shoe style work for everyone, there is not one-size fits all RSM setting. Only after knowing what your objectives are and what type of investments you want to make, can you then test to find the settings that will work best for your group, your 401k or any other group of funds, Etfs or stocks.
Author Raymond Dominick is the designer of Dynamic Investor Pro investment software for stocks, ETFs and mutual funds. He has been investing in the markets since his teenage years. An experienced business manager and journalist, he has been a registered investment advisor representative, also a professional photographer who loves escaping to the wonders of Glacier National Park in Montana.
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