School Corner
school corner Thierry Laduguie of E-yield’s top 3 combined technical signals In my trading, I actually use a variety of indicators depending on what instrument I am trading. If I am trading stocks then I would go for standard technical indicators like the relative strength, moving averages and RSI. If I trade the index however I would go for more advanced techniques like Elliott wave analysis and sentiment indicators that I find are more reliable in predicting the direction of the market.
On the chart to the top right of Diageo (DGE) the stock is compared to the FTSE 100 index and the relative strength is the blue trendline. When the relative strength moves up the stock outperforms the index performs better than the index. When the relative strength moves down the stock underperforms performs worse than the index. When the relative strength moves sideways both the stock and the index perform the same.
On Stocks
What does the relative strength tell us? At first glance a rising relative strength over a six-month period or more tells us that the stock has strong fundamentals, and it could be one of the reasons why the stock has outperformed the index.
One of my favourite technical signals combines the relative strength and the 55-day moving average (a particular moving average that I note Dominic Picarda - another contributor to this magazine is keen on albeit of the ‘exponential’ variety). Relative strength (a comparative measure) compares two securities/instruments to show how they are performing relative to each other. A stock’s price change is compared to the index price change (the base security), the relative strength is calculated by dividing the stock’s price by the index price.
In the case of Diageo, the relative strength has been rising for more than six months, the stock is still making new highs whereas the FTSE 100 is not. In this situation, each time the stock drops below its 55-day moving average it is a Buy. This occurred twice this year in May and September (blue arrows).
86 | www.financial-spread-betting.com | December 2012