Relative Strength (RS) Guide 2026: How to Find Truly Strong Stocks

Core Definition of Relative Strength

Relative Strength (RS) is a ratio comparing a stock's performance against the market (e.g., SPY or Hang Seng Index).

Formula:

RS = Stock past N-day return / Market past N-day return

Example:

• Past 12 months: Stock up 30%, Market up 10%
• RS = 30 / 10 = 3.0 (stock performed 3x better than the market)

RS Rating Interpretation

William O'Neil converts RS values into a 1-99 rating:

Key Principle: Only buy stocks with RS Rating > 70. According to O'Neil's research, over 95% of strong stocks had RS Rating above 70 before their pattern breakouts. Visit our Strategy Center to learn how to apply RS in practical strategies.

Three Advanced RS Techniques

Technique 1: RS Trend Matters More Than Absolute Value

• RS rising: stock relative strength is increasing (even if absolute value is not high)
• RS falling: stock relative strength is weakening (even if absolute value is still high)
• Buy stocks with rising RS, sell stocks with falling RS

Technique 2: RS + Pattern Dual Confirmation

This is the core technique for improving win rate:

Technique 3: RS Divergence

• Bearish Divergence: Price makes a new high, but RS does not

  • Indicates relative momentum is weakening
  • Other stocks are starting to outperform this one
  • Consider reducing or exiting

• Bullish Divergence: Price makes a new low, but RS does not

  • Indicates relative momentum is improving
  • May be forming a bottom
  • Add to watchlist

Practical Stock Selection Process

Step 1: RS Screening

Set in Stock Screener:

• RS Rating > 70 (minimum standard)
• RS Rating > 80 (recommended standard)

Step 2: RS Trend Confirmation

• Has RS been rising over the past 3-6 months?
• Is RS in the top 20% of its industry?

Step 3: Pattern Confirmation

• Do the high-RS stocks have actionable technical patterns?
• Is volume supporting the pattern?

Step 4: Entry and Risk Control

• Entry: after breakout confirmation
• Stop-loss: 5-8% below the pattern's key low
• Tracking: continuously monitor RS changes, consider exiting when RS weakens

RS Application for Hong Kong Stocks

Characteristics of the HK Market

• Hang Seng Index has limited constituents (82 stocks), narrower RS reference range
• Recommend comparing with industry leaders, not just the market index
• Stocks favored by northbound capital typically have higher RS

HK RS Calculation Recommendations

Common Mistakes

Mistake 1: Looking Only at RS, Ignoring Patterns

High RS means strong past performance, not guaranteed future appreciation. Must combine with technical patterns for entry timing.

Mistake 2: Buying Stocks with Falling RS

Thinking "it has fallen enough, it should bounce." Falling RS means money is flowing out; do not fight the trend.

Mistake 3: Selling Stocks with Rising RS

Thinking "it has risen too much, it should pull back." Strong stocks can remain strong for months or even years.

Mistake 4: Ignoring Industry RS

Sometimes it is not the stock that is strong, but the entire industry. Check if the stock's RS is above the industry average.

Summary

Core principles of RS:

1. Only buy stocks with RS > 70
2. RS trend matters more than absolute value
3. RS + Pattern = High win rate combination
4. RS weakening = consider exiting

Remember William O'Neil's famous quote: "The market is always right. Buy stocks that the market tells you are strengthening, sell stocks that the market tells you are weakening." Want to know which stocks are strengthening? Check Market Pulse for real-time market tracking.

For best results, combine with Cup and Handle Pattern and VCP Contraction Pattern.