Relative strength (RS) investing focuses on securities outperforming their peers. It's one of the oldest and most research-backed approaches in active trading — here's how it works and how to apply it.
Relative strength (RS) investing is both simple in concept and powerful in practice. The idea: instead of trying to buy securities that are cheap and wait for the market to recognise their value, you buy the ones already outperforming their peers — the ones the market is already endorsing — and stay with them as long as the relative outperformance continues.
It's the quantitative backbone of momentum investing, and its effectiveness has been documented in studies spanning more than a century of market data, multiple asset classes, and dozens of countries.
There are several ways to calculate RS, but the most common approaches used by systematic traders are:
The specific formula matters less than applying it consistently. What you want to identify is simple: which securities are outperforming right now, and which are not?
Sector-level RS is a powerful tool for top-down selection. Before screening for individual stocks, identify which of the 11 GICS sectors is leading the market. Stocks in leading sectors benefit from two tailwinds: the broad market (if it's rising) and their own sector (which is rising faster than the market).
The 0-100 RS scores on the Leaders tab in WideRadar are calculated for all 11 SPDR sector ETFs versus SPY. A sector scoring 80+ is consistently outperforming the S&P 500 over recent weeks — that's where momentum investors should be concentrating their attention.
When a previously lagging sector's RS score starts climbing rapidly, that's an early signal of rotation — money moving in before it becomes obvious. These rising-RS sectors often produce the best individual stock breakouts over the following weeks.
Within a leading sector, individual stock RS lets you rank which names are leading the sector itself. The stocks you want are those:
The Emerging Leaders table in WideRadar specifically captures the "improving RS" criterion — stocks whose relative strength has been accelerating over recent weeks. These are often the early-stage leaders before they appear on conventional screens.
RS can also tell you when to exit. A stock whose RS rank has been deteriorating for several weeks — even while the stock's absolute price holds up — is losing ground to the market. That relative deterioration often precedes absolute weakness by weeks.
A practical rule: when a stock that qualified as a leader (RS > 70) drops below 50 and stays there for more than a few weeks, the leadership thesis has broken down. Continuing to hold purely because it's still above water in absolute terms ignores what the market is telling you through relative performance.
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