Have you always wanted to long the strongest market and short the weakest one? I sure do.
Because if I stay long in a strong uptrend and short in a strong downtrend, the odds of riding a trend increases tremendously.
The best thing is you do not need any fancy indicators or tools, all you need is your eyes.
Allow me to introduce you the concept of relative strength. It can be applied across all markets like currencies, energy, agriculture etc. which makes it a universal technique to use in your trading.
By using relative strength we can easily identify which markets are strongest and which are weakest.
How to do it
Firstly we must always compare the 2 different products within the same sector. So you should compare products like Silver & Gold, Corn & Wheat, Eurusd & Euraud etc.
Secondly we plot both the 20 & 50 EMA and pay attention to 2 things:
1) Steepness of the slope
2) Where price is relative to the moving average, above or below?
Below are 2 charts that will illustrate.
Notice on Nasdaq it has a steeper moving average and is above the 20 & 50 EMA . Whereas on DAX the moving average is not as steep and has already broken the 20 & 50 EMA.
This tells me that Nasdaq is relatively stronger than Dax because it has a steeper moving average with price above the 20 & 50 EMA.
Thus if I am bullish on the indices, I want to long the Nasdaq compared to the Dax. Because chances are the Nasdaq will rally harder and pullbacks will be shallower.
A simple technique like this will ensure you are always longing the strongest markets and shorting the weakest one.
As a trend follower, identifying trend alone is not enough to make good trades. You need to find relatively stronger or weaker markets to stack the probabilities in your favor.
So start applying the relative strength concept to get better trades and a greater risk to reward profile.
So, do you find yourself getting better trading setups now?