How To Read Stock Charts: Relative Strength

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How can you tell if a stock you're thinking about buying is outperforming the market? One quick and easy way is by looking at the relative strength line, a key technical indicator. So if you're just starting to learn how to read stock charts, you'll want to pay attention to this. A good stock chart will give you an indicator that you can use to help confirm your buying decisions -- the relative strength line. ((Take a look at this chart from IBD’s MarketSmith service.)) The relative strength line is the blue line on the chart. It measures a stock’s price performance versus the S&P 500, which is often used to represent the overall market. So if you’re comparing a stock’s price move to that of the S&P 500, that can help you determine whether or not the stock you’re thinking about buying is showing outperformance. If the relative strength line is trending down, it tells you the stock is lagging the overall market. But, if the relative strength line is trending higher, that means the stock is outperforming the market. Furthermore, if the line is spiking to a new high, that’s bullish. What’s even more bullish is if the relative strength line is at a new all-time high before the stock’s price reaches a new all-time high. When a stock is breaking out and entering a buy area, seeing the relative strength line at a new high is a positive confirmation. So just like you want to see heavy volume on a breakout, as well as the stock closing in the top half of its trading range, another bullish indicator is the relative strength line at a new high. This chart also has a Relative Price Strength Rating next to the relative strength line, which is a little different. While the relative strength line compares a stock’s performance to the S&P 500, the Relative Strength Rating calculated by Investor’s Business Daily measures a stock’s price performance compared to all the other stocks in our database. With 1 being the lowest and 99 the highest, think about these ratings like grades on an exam. A 90 or higher is especially positive. The takeaway here: buy stocks that are outperforming the market, because that will increase your chances of scoring big gains. Make sure to check out investors.com and MarketSmith, where you can find screens for stocks with relative strength lines at new highs. And at investors.com/howtoinvest we have a detailed education on how to invest in stocks. Learning how to invest in stocks is an important first step to building wealth. But where do you start? How do you buy stocks? How do you know when to sell stocks? Do you really need to know how to read stock charts? You'll find the answers to all those questions as we continue to add new How To Invest videos to this page. How To Start Investing In Stocks Before you start investing in stocks, it's important to learn how the stock market works and understand some basic rules about how to buy stocks and when to sell stocks. At Investor's Business Daily, you'll find a time-tested investing strategy known as the CAN SLIM Investing System. Developed from our unique study of every market cycle since the 1880s, the CAN SLIM system identifies the seven common traits of winning stocks. And the videos below will show you how to apply various aspects of the CAN SLIM strategy. Be sure to subscribe and keep coming back, as we'll be adding new How To Invest videos on chart patterns, buying and selling and more topics in the days and weeks ahead. Investor’s Business Daily has been helping people invest smarter results by providing exclusive stock lists, investing data, stock market research, education and the latest financial and business news to help investors make more money in the stock market.