The stock market is a highly volatile environment, in which dynamics are in motion owing to such different factors as economic conditions, earnings reports, and news globally.
Understanding exactly how the market has been performing and what assets are best to trade is what will bring success.
Markets have been rebounding lately, raising optimism among both traders and investors.
This article goes beyond just talking about the contemporary situation of the stock market to share a time-less strategy that identifies the best-performing markets in the available stocks, Forex, commodities, or cryptocurrencies.
This guide introduces the use of percent change charts to unlock hidden opportunities in any market environment.
Current State of the Stock Market
The stock market has begun to recover after a tumultuous period, in which benchmark S&P 500 managed to bounce back, but still many traders are eager for a test of its 200-day Simple Moving Average (SMA).
A few even believe the market may fall slightly below and then continue moving up from there.
While such predictions might be exciting, it is also worth keeping in mind that markets are inherently unpredictable. Probable scenarios rather than attempts to predict the future are what successful traders keep focus on.
For example, some investors have already realized early profits from the recent rally by buying out-of-the-money call options, even at returns of up to 30%.
However, trading is not a simple win-or-lose game. Position management, identifying situations to take risks, and ideal times to reap profit sum it all.
Why Relative Strength Charts Are So Important
Relative strength charts, also known as percent change charts, represent the obvious chart tool designed for traders.
Unlike most charts of price, these charts show percentage change of two, or more markets from a given point in time to make a comparison between the performances much easier.
Advantages of Percent Change Charts
With Percent Change Charts, the following advantages have been useful:
- Clarity: They noise out price. Clear percentage gains or losses are clearly present.
- Comparative Insight: They allow traders to compare multiple markets, sectors, or assets on one chart.
- Actionable Data: By identifying outperformers and underperformers, the best trading opportunities are easily pinpointed.
For example, since January:
- The NASDAQ 100 (QQQ) has gained nearly 30%, far outperforming other indexes.
- Russell 2000 (IWM) has dropped by over 7% as an example of its underperformance.
- The S&P 500 (SPY) is up about 8%, and the Dow Jones Industrial Average (DIA) shows modest growth.
This stark contrast underlines the necessity of selecting the right market on which to trade.
How Percent Change Charts Work for Max Profit
Step 1: Monitor Multiple Markets
Begin by comparing important indexes, such as the S&P 500, NASDAQ 100, Russell 2000, and Dow Jones. This gives a general view of market trends and therefore helps to detect the strongest and weakest performers.
Step 2: Determine Trends
Focus on those markets that normally outperform others.
Watch the retracements; markets that retraced less during pullbacks implied a stronger market.
Step 3: Expand to Other Assets
This approach is not limited to indexes of stocks. Apply it to:
- Sectors and industries.
- Forex pairs.
- Commodities.
- Cryptocurrencies.
For example, percent changes by using a chart to determine which Forex pairs are trending, meaning they are going to give the greatest payback.
Sector Rotation and Market Evolution
Sectors or asset classes rotate in and out of leadership and typically languish in a sea of mediocrity at different times.
Investors must lead or follow these rotations or risk falling into the trap of losses.
Example from History
As of 2020, in a recovery phase:
- The Russell 2000 (IWM) rose by 48%, while the NASDAQ 100 (QQQ) only rallied by 12%.
- Those who noticed this Russell outperformance at an early time had four times the returns than those tracking the NASDAQ.
This explains why the traders need to keep on updating their approach as the market dynamics change.
The Secret Sauce: Contrarian Breakout Strategy
Percent change charts can be made effective by adding in such a contrarian breakout strategy.
How It Works:
- Trend Lines: Identify laggards and draw a trend line through the high.
- Breakout: If they now break above the trend line, it suggests potential sector rotation and bullish momentum.
For example, if the Russell 2000 lags but now is breaking out of its downtrend pattern, it might suggest that small-cap stocks are ready to lead the market.
Alternative Approach
Another method is to look for markets that create higher highs before others, indicating early strength.
Both techniques help traders enter markets before major moves, giving them a significant edge over those who rely solely on traditional technical analysis.
Combining Tools for Precision Trading
While percent change charts highlight opportunities, they are only the starting point.
Once you’ve identified a promising market or asset, analyze its candlestick chart for:
- Support and resistance levels.
- Trendlines.
- Market timing signals.
Market Timing Indicator
One useful tool for trading entries is a market timing indicator. It aids the trader to:
- Identify entry and exit points.
- Verify trends and reversals.
For more information on how to utilize and tailor this indicator to your style of trading, go to indicatorwebinar.com and enjoy a free tutorial presentation.
Real-Time Example: An Illustrative Application
You are considering a comparison between the S&P 500, NASDAQ 100, Russell 2000, and Dow Jones:
- The NASDAQ 100 is the clear winner, up nearly 30% year-to-date.
- The Russell 2000 lags, down 7%.
This has you employ the contrarian breakout strategy. The Russell breaks above its trendline, which means a reversal may be underway. Getting in early, you capture profits as small-cap shares begin to ascend.
This strategy turns underperforming markets into profitable opportunities, which shows what proactive trading can do.
Conclusion
Understanding how the stock market is doing involves more than tracking broad indexes.
By using tools like percent change charts and combining them with contrarian strategies and market timing indicators, traders can consistently outperform.
Whether you’re trading stocks, Forex, commodities, or crypto, this technique helps identify the best opportunities and navigate ever-changing markets.
Start applying these insights today to achieve greater profitability and confidence in your trading decisions.
