Relative Strength Momentum: Finding Market Leaders
One of the most reliable patterns in markets is that winners often keep winning. This is the foundation of Relative Strength Momentum, which ranks stocks by their performance over a medium-term period (commonly 3 to 12 months) against their peers. By identifying the leaders in a group, traders can focus on stocks with the highest probability of continuing to outperform.
Unlike simple price momentum, which looks only at a stock’s own moves, relative strength compares each stock to others in the same universe. The goal is to highlight which stocks are displaying the strongest trends relative to their peers, rather than the market overall. For example, two companies in the same sector might both be rising, but the one climbing faster relative to its group is considered stronger.
Here’s how it works in practice: traders calculate percentage returns over a set timeframe, such as 6 or 12 months, then rank all the stocks in the list. The top-ranked stocks—those with the strongest returns—are flagged as potential leaders. Historical research shows that these leaders often continue to outperform, as strong performance tends to attract more attention, buying interest, and capital inflows.
For instance, imagine you are analyzing the technology sector. Over the last 12 months, Stock A is up 45%, Stock B is up 30%, and Stock C is up 10%. By relative strength momentum, Stock A ranks highest. If sector momentum continues, Stock A is more likely to keep leading, while Stock C may lag behind.
There are some advanced applications as well. Traders often combine relative strength momentum with filters such as moving averages or market conditions to avoid chasing stocks that are overextended. Others use it to build baskets of leaders, spreading risk across several high-ranked stocks instead of just one. Divergence signals can also appear: if a stock ranks highly but volume or broader momentum weakens, it may be an early warning sign.
The strength of relative momentum is its simplicity and evidence-based foundation. Numerous studies in academic finance show that medium-term winners tend to keep outperforming, making this one of the most widely used approaches in both professional and retail trading.
Of course, no strategy works all the time. Leadership can shift suddenly when sectors rotate, earnings disappoint, or macro conditions change. That’s why many traders rebalance their rankings regularly—monthly or quarterly—to stay aligned with current leaders.
At STKLY, our Relative Strength Momentum alert automates this process. We rank stocks against their peers and highlight those with the strongest medium-term returns, so you can focus your attention where momentum is most likely to persist. 📈
