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Part 2: MetaStock Download Relative Strength Comparison
(RSC) System
By
David Jenyns
In Part 1 of this article I discussed the importance of sector analysis,
and the use of the Relative Strength Comparison to identify the best
performing securities in the best performing sectors. In Part 2, I
will show you how to use my MetaStock download system to find these
securities. (Grab your MetaStock download system now).
To create an exploration that uses the RSC MetaStock download system
you need to first open a chart of the base index (e.g. S&P/ASX200
for the Australian market, or the Straits Times Index for Singapore
) that you will be using for the comparison between market sectors.
Once the chart is open, left click on the price plot to highlight
the price information. You'll know it's selected when a series of
small dark squares appear on the price plot. It's important to note
that each time you wish to do an exploration of this kind, you must
first choose your base index. This is how you must run the MetaStock
download system.
Next, open the Explorer dialog box and select 'new'. Name the Explorer
the 'MetaStock Download Guide Sector Analysis'. Then click within
'Column A' and enter the following formula:
ROC(MOV((C/P),13,S),1,%)
This formula calculates the rate of change, as a percentage, in the
relative strength of the sectors against the base index over a 13
week period. It may seem complex but let's break it down into manageable
MetaStock download parts, beginning with the inner-most brackets first:
C/P is the relative strength (or RSC component) of the tested
sectors vs. the base security. The way it's calculated is by dividing
the closing price of the sector, by 'P', where 'P'
is the base index that you highlighted before creating this Metastock
download exploration.
(MOV((C/P),13,S) calculates the moving average of the RSC
over a 13 week period.
ROC(MOV((C/P),13,S),1,%) calculates the rate of change of
the moving average of the RSC, in other words, the amount the sector
has moved up or down as a percentage.
Looking back at the MetaStock download system, note that you didn't
enter anything into the filter tab. This is because you only use the
filter tab when you're looking to remove certain securities from your
exploration results. Since you're not looking to exclude any sectors,
but to rank all the sectors, you should leave the filter blank.
Before running this Metastock
download exploration you must check the time period. To do this
click the 'Options' button at the bottom of the 'Exp l oration Edition'
dialog box and then select the radio button marked weekly. Click 'OK'
twice to return to 'the Explorer' dialog box.
Now you're ready to run the exploration, so click 'Explore'. The 'Select
Securities for MetaStock Download Guide Sector Analysis' dialog box
will appear, and you must select the directory with your market sectors
in it. This directory should be stored with your other market data
and is usually one directory up from your equities folder. However
this can vary, depending on who supplies your MetaStock download data.
When the market sectors are highlighted, click 'OK'. When the exploration
is complete the 'Exploration Completed' dialog box will appear. Click
the 'Reports' button and to get a summary of the exploration. The
results shown in 'Column A' will give you the rate of change of the
relative strength
Tip: By clicking the 'Column A' heading you can arrange
the results in ascending or descending order.
What Do these Results Mean?
The results of this MetaStock download exploration are fairly straightforward.
A value greater than zero indicates that market sector is outperforming
the base index. A zero indicates that the market sector is performing
on par with the base index, while a negative number indicates the
market sector is under-performing the base index.
Remember, a rising MetaStock download RSC value only indicates that
the market sector is outperforming the base Index, it does not necessarily
mean the sector is rising in value. Similarly, if the RSC is falling;
it only indicates that that sector is under-performing the market
index, the market sector may not be loosing value. Because of this,
it is important to open the chart of the market sectors to analyse
the trends.
This information on its own can complement your current trading. For
example, you may decide to only trade securities which are in top
performing sectors. Or, you could take it one step further and select
the top five sectors and use the 'MetaStock Download Guide Sector
Analysis' explorer again. This time, however, you could compare individual
securities against their respective sectors.
The difference between running this exploration and running the first
one, is that the market index would now become the market sector chart;
and the list of sectors would become the list of securities that make
up the top performing sectors.
By following the same steps as before you could run five separate
explorations and rankthe securities against their respective sectors.
The result would identify the top performing MetaStock download securities
within the top five sectors.
The final stage in this top down Meatstock download analysis would
be to open all the charts that have made it to the shortlist. You
can whittle this list down further by eliminating those securities
that aren't in an up-trend or those that are too thinly traded. In
the end you'd be left with the cream of the crop, between five and
ten MetaStock download securities. These securities will be the best
performing securities in the best performing sectors.
These securities should now be placed on your watch list. I suggest
you don't race out and buy them. Instead, wait for an appropriate
trigger to enter. This could be based on candlestick patterns, and/or
favourable combinations of other bullish Metastock download indicators.
The RSC exploration is a great way to utilise the power within MetaStock
download system. It can be an extremely effective tool in identifying
profitable trading opportunities. The downside for this type of exploration
is that it is not a complete system on its own and would need to be
combined with other entry, exit and money management rules. However,
you can create a solid Metastock
download trading system that would benefit greatly from including
sector analysis.
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