Relative strength investing looks to capitalize on the underappreciated resilience and potential of strong companies. While other investors focus on news, market conditions, and company fundamentals, relative strength investors buy stocks that have outperformed the market over an extended period of time. This momentum-based investing technique relies on the fact that strong stocks tend to remain strong, while weak stocks are likely to remain weak.

The aim of a successful relative strength strategy is to identify stocks that have outperformed the market or benchmark over varying time periods and purchase them before the market or other investors realize their true potential. Relative strength investors look for stocks that have shown consistently strong performances over the past year, and may even look back five or 10 years. This type of investing attempts to take advantage of the fact that some stocks tend to outperform the market over extended periods of time, regardless of what’s causing the market to move.

Relative strength investors generally use technical analysis or charting to identify overbought or undervalued stocks. Technical analysis focuses on the analysis of past trading activity in the context of current market conditions. Technical analysts look at historical stock prices, volume trends, patterns in the share price, and indicators of momentum. By studying the activity of a stock over a period of time, relative strength investors look for signs that its appreciation is likely to continue.

Relative strength investing has several advantages. One of the greatest benefits of relative strength investing is that it is comparatively immune to market volatility. This type of investing does not try to time the market, but instead looks at each stock or index on its own merits. This method also helps to minimize risk, since relative strength investors are buying stocks that have already proven themselves in the market.

However, relative strength investing also has its drawbacks. While its aim of picking strong stocks is admirable, this type of investing is not foolproof. A stock that continues to rise may suddenly take a turn for the worse and experience a prolonged downturn. Additionally, this strategy may miss out on some up-and-coming stocks that are currently undervalued by the market. Relative strength investing depends on the premise that the trends of past performance will continue into the future, but this is not always the case.

Overall, relative strength investing can be a valuable tool for investors who are looking to capitalize on strong performers. While not foolproof, this strategy can be a viable option for investors looking to minimize risk and maximize returns.