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I am 100% agree with you. Now there are 3 versions of relative index
tools. those who are intersted with this theory should put their own
effort to develop.
--- In equismetastock@xxxxxxxxxxxxxxx, superfragalist <no_reply@xxx>
wrote:
>
> The problem with relative strength in general, regardless of what
> someone uses to calculate it, is the measure of strength it gives
is a
> relative number only and does not mean the same thing from day to
day.
>
> For example, if the relative strength of 100 stocks is calculated
and
> sorted, today the top strength rating for the strongest stock might
be
> 58 and tomorrow it might be 38. While it is true that the sorting
does
> rank the stocks by their relative strength, the problem is numerical
> value associated with the strength is meaningless and can't be used
in
> a tester to determine the effectives of relative strength as a
filter
> for a particular trading system. At least not with the tester
> available for MS.
>
> In addition trading rules can't be written that define an entry
with a
> relative strength rating above X because X is a relative number.
>
> I use the external relative strength which compares a specific stock
> to every other stock in the pool of stocks being looked at. That
pool
> can be the entire market or 100 stocks, etc. If a stock is out
> performing 98% of all other stocks last week and 98% of all stocks
> this week then those two percentages mean exactly the same thing.
>
> This is relevant because various performance thresholds can be
tested
> in the tester across varying look back periods to find the external
> relative strength filter that is the most effective with any
> particular trading system.
>
> If someone wants to compare the relative strength of stocks to an
> index like the S&P500, simply include the SPX index or SPY ETF in
the
> pool of stocks. All of the stocks that have higher strength than the
> SPY are performing better and all the stocks that have a lower
> external relative strength numerical ranking are performing worse.
> This too can be tested or programmed into a set of trading rules. In
> other words, someone could write an equation to ignore all trades
> signals on stocks that were performing worse than the index.
>
> I use the old SpyGlass program to calculate the relative strength.
> It's now called Fire. The external relative strength calculations
that
> SpyGlass does are nearly identical to the ones IBD does. IBD uses a
> larger pool of stocks than I do, but I have cross compared the lists
> and the ranking differences weren't statistically significant.
>
> I use the old SpyGlass because it's really the only method I've
found
> that has the appropriate dll's to do the calculations consistently
and
> correctly. I've heard someone else was writing a dll for this
purpose
> but so far I haven't seen one. The external relative strength
> calculations in SpyGlass are about as easy as it gets.
>
> In my various systems tests I have found that using the external
> relative strength as a filter improves the performance of almost all
> of the trading systems I tested it in.
>
> However, overall the filters that I've found that have improved
> performance the most are a market conditions filter that keeps the
> system from trading against the trend, a prescreening of trade
> candidates with fundamental and quantitative constraints like those
> used by Value Line, IBD, Ford Equity Research and S&P platinum and
> neural fair value screens, some sort of simple volume filter, and
> finally the use of external relative strength.
>
> Those four things had the most impact on the hundreds of trading
> systems I've tested them in. Based on the results, I've written
about
> a simple trading system in Roy's newsletter with the test results
from
> those items on one system so the impact is objectively measured.
>
> Here is a simple relative strength equation that has a look back
> period of 120 bars and is weighted 40% more for the last 30 bars,
etc.
> When the stocks are sorted according to the numerical values coming
> out of this equation, the sorted list compares very closely with
other
> software that calculates relative strength. Again the problem is the
> numerical values have no comparative values except the relative
> comparison for that day. You can use threshold values in tests or
> equations as I explained before.
>
> ROC(C,30,%)*0.4+ROC(C,40,%)*0.2+ROC(C,60,%)*0.2+ROC(C,120,%)*0.2
>
> Based upon my trials and tests with this equation, if I just wanted
to
> be able to sort a group of stocks from the highest to lowest
> performers over some look back periods, I would just use this
equation
> because it gives very similar results to all the other methods of
> calculating relative strength that I could find and I bought or
> programmed every program I could find that did those calculations.
>
> Have fun! Ain't volatility wonderful...
>
> Super
>
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