Two types of Analysis – My Favorites
There are many ways to analyze stock market data for safe profitable investing. But my favorites are relative strength momentum and alpha.
Both of these are types of relative strength analysis.
Don’t be confused between relative strength and momentum.
Analyzing based on momentum is like comparing horses at the Kentucky Derby. They are all fast. In fact they’re probably all faster than a quarter horse or mustang out on the range. Picking the winner is just like buying a stock based on its momentum along. All the horses are winners, but only one is going to bring in the prize money.
However, using relative strength analysis (RS) looks at the particular speed or each horse, or the rate of gain of each stock and the difference between all the horses or stocks. Now you know the relative strength of each as compare to each other – and the likely winner.
Relative Strength Momentum (RSM) takes RS a step further. Now you can compare the rate of change or each stock against a major benchmark like the S&P 500. This tells you how your stock or mutual fund is performing as compared to the S&P 500.
Alpha takes RS even further than RSM. Instead of just comparing all your stocks momentum against the benchmark now each stock is also compared against the other stocks. A ranking of a group of stocks or funds based upon alpha analysis is generally more aggressive than just using relative strength momentum.
Unfortunately it is not wise to just analyze all your groups with either RSM or alpha. My tests indicate that each group of stocks, ETFs or funds re-acts differently to different types of analysis. This means you will find the best trading strategies for profitable investing if you first do a back-test optimization with each type of analysis.