What Is My Starting Point for Stock Selection ?

Most traders spend time analyzing stocks that never mattered in the first place.

This is a chart of Castrol on Marketsmith India platform.

As you can see, since Aug 2024, the stock is just languishing.

Gone nowhere.

There is one number on this screenshot that immediately changes how I look at this stock.

The Relative Strength Rating, shown here as Price Strength, is 45.

That single number tells you far more than most indicators on the chart.

The RS Rating has been a game changer in my trading journey.

It helped me narrow my focus to only those stocks that are worth my time, attention, and money.

I first came across the RS Rating while reading Mark Minervini’s "Trade Like a Stock Market Wizard."

In his trend template, he talks about moving averages, the 52-week high, and the 52-week low.

But he clearly mentions that all these technical criteria apply only when a stock has a Relative Strength Rating of 70 or more.

That made me curious.

Why would technical criteria not apply to all stocks?

Why only to stocks with a certain RS Rating?

Initially, I confused RS Rating with RSI.

Then I realized they are very different.

RSI is a technical indicator.

RS Rating is a comparative measure.

It compares one stock with all other stocks in the entire market, not just within its industry group.

So when you see a Relative Strength Rating of 45, as in the case of Castrol here, it simply means this stock has performed better than only 45% of all stocks in the market over the last 52 weeks.

In other words, more than half the market has done better.

It has nothing to do with chart patterns.

It has everything to do with market leadership.

This became even clearer when I read William O’Neil’s "How to Make Money in Stocks."

In the CANSLIM system, the “L” stands for Leader or Laggard.

O’Neil explains that leading stocks tend to show high Relative Strength well before their major price advances.

In fact, the average RS Rating of historical market leaders before their big moves was around 87.

That insight changed how I filter stocks.

Today, I use a Relative Strength Rating of 80 or more as my starting point.

This means I am only looking at the top 20% of stocks based on 52-week performance.

From there, I apply other filters to narrow the list down to a small, actionable watchlist.

This also explains why a stock can be fundamentally strong and still not qualify for me.

A low RS Rating simply tells me that the market is not yet convinced about its future prospects.

Markets are forward-looking.

That is why Relative Strength matters.

For me, it is the starting point of stock filtering.

In positional trading, where fundamentals matter, I require an RS Rating of at least 80.

In swing trading, where fundamentals matter less, my standards are even stricter.

The higher the Relative Strength, the better.

I look at everything through the prism of risk management.

Stocks with RS Ratings between 70 and 80 are not bad stocks.

They are simply riskier compared to stocks with RS above 80.

I do not reject them outright, but I prefer to tilt the odds in my favor.

This one filter alone has dramatically reduced noise in my decision-making.

It has narrowed the universe of stocks I pay attention to every single day.

That, in itself, is a massive edge.

If you filter stocks daily, start with Relative Strength.

Regards,

Rohit Musale, CFA

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