Relative Strength Rotation and Risk Control
If you want cleaner trades, you need two things working together, relative strength (so you’re fishing in the right pond) and risk control (so one bad trade doesn’t wreck your week, month, or year).
When I’m scanning, I’m not trying to predict every headline. I’m trying to spot where money is flowing right now, then I’m trying to structure trades where the risk makes sense.
Understanding relative strength rotation in ETFs
When I talk about relative strength rotation, I’m usually looking at group ETFs, theme ETFs, and sector ETFs. These ETFs act like buckets. Each bucket is filled with stocks in that space.
So when I pull up GDX (gold miners), TAN (solar), XOP (oil and gas exploration and production), SIL (silver miners), or XLE (energy sector), I treat the ETF chart as a proxy for the average stock in that group.
The big idea is simple. I want to be in the right group at the right time.
I love the motorsport quote Martin Brundle used in commentary: ”You’ve got to be on the right tire at the right time.‘ Trading feels the same to me. Right stock, right group, right moment.
ETFs as “the average stock” in a group
If I’m looking at a group ETF, I’m not doing it because I want to trade the ETF. I’m doing it because it helps me answer:
- Is this area of the market strong or weak versus the S&P 500?
- Is this group trending, or is it chopping around?
- Are there likely to be high-quality setups in the leaders?
A big part of that is the relative strength line (RS line) versus the S&P 500. If that RS line is hitting 52-week lows, the group is underperforming badly. If it’s hitting 52-week highs, it’s outperforming.
Timing matters more than “the story”
A group can look exciting on paper, with endless articles backing it up, and still be a bad place to focus if it’s showing persistent relative weakness.
That’s why I keep coming back to one principle: Money doesn’t disappear. The money moves.
If money is flowing out of one area, it’s flowing into another. As traders, we’re trying to follow those rotations without getting married to a narrative.
What relative weakness looks like (GDX example)
Please watch the video for the example.
With GDX, the key tell is the RS line. When it’s in a downtrend versus the S&P 500 and printing 52-week lows, that’s a clear “no thanks” from me. Even if the chart looks like it might bounce, the group is still a weak place to be fishing for long setups.
Then the character can change.
You’ll see a classic cycle:
- Phase 4 downtrend
- Phase 1 base (often with “spring” type action, undercutting lows)
- RS line starts to turn up
- Breakout on volume
- Phase 2 uptrend
When the ETF transitions into a phase 2 uptrend, that’s where I start caring again. Not because every stock in the group will work, but because odds improve that some leaders will offer clean setups.
What I look for once a group turns strong
When the group is strong, I pay close attention to how it behaves around moving averages, mainly the 21-day EMA and the 50-day moving average.
If the “average stock” in the group keeps pulling back to those levels and holding, that often sets up:
- pullback entries,
- continuation bases,
- shakeouts that reset weak hands.
This is also where leadership matters. Leaders usually break out first, and they usually top first too. Once the group starts to show distribution, lower highs, lower lows, bigger red volume spikes, and RS deterioration, I assume the best names have already started topping.
“One bar can change everything” (TAN and moving average pullbacks)
Solar is a great example of why I stay open-minded. Please see the video for the example.
With TAN, there are stretches where the RS line is hitting 52-week highs. That’s when I’m alert for pullbacks to the 50-day moving average, because those pullbacks can look ugly while still being normal.
Something can waterfall down to the 50-day for days, look terrible, then one bar flips it. A gap-down reversal bar or a shakeout demand tail near the 50-day can change the whole feel of the chart.
That’s why I remind myself: One bar can change everything.
Rotation example: SIL silver miners in 2024
I saw the same rotation logic in SIL (silver miners).
For a long time, it was “no interest” because the RS line was making 52-week lows versus the S&P 500. Then the RS line started to turn up. That’s the tell. A previously unloved group starts to get bid, and now it becomes relevant.
Once that happens, I’m watching for the group ETF to start building constructive bases and for bounces off key averages (especially repeated reactions around the 21-day EMA). If the group is tightening and the RS is improving, leaders inside that group can offer great trades.
Choosing between two areas (TAN vs XOP)
Overlaying TAN with XOP makes the decision process clearer.
If TAN is basing while its RS line is hitting 52-week highs, and XOP is trending down with an RS line in a downtrend and price below the 200-day moving average, I know where I want my focus.
Even if I find one oil and gas stock that looks “okay,” I’d rather spend my time in the stronger pond.
Optimal risk-to-reward ratios for swing trading
Once I’m focused on the right areas, the next job is structuring trades so the math works.
Losses work against you geometrically
Losses don’t hurt in a straight line. They compound against you.
Here’s the quick reality check:
| Loss % | Gain to breakeven % |
|---|---|
| 5% | 5.26% |
| 10% | 11% |
| 50% | 100% |
| 90% | 900% |
That’s why I’m so blunt about it: if I can’t control and mitigate risk, I can’t trade. There’s no foundation.
I also like the golf analogy Bryson DeChambeau talks about (often linked back to Tiger Woods): it’s not how good your good shots are, it’s how bad your bad shots are.
Asymmetric risk-to-reward is the whole point
I want trades where the reward is larger than the risk, because that lowers the win rate I need to make the approach work.
Here’s what break-even win rates look like depending on risk-to-reward:
| Risk:Reward | Breakeven win rate |
|---|---|
| 50:1 | 98% |
| 3:1 | 75% |
| 1:2 | 33% |
| 1:3 | 25% |
| 1:10 | ~9% |
If I’m risking 3 to make 1, I need to be right 75% of the time just to break even. That’s not realistic for most swing trading.
So I’d rather live on the other side of the table, where I’m risking 1 to make 3 (or better). That’s the “Goldilocks zone” for me.
The “Goldilocks zone” and building failure into the system
Trading includes being wrong, a lot. I accept that upfront.
In the course, I referenced an example around a 3:1 framework where gains of 21% and losses of 7% can compound into a positive return over 10 trades, even with a 30% win rate (6.59% compounded in that example).
My personal style is tighter than that. I don’t like average losses around 7%. I’d rather be wrong small and move on. I even said my average loss for the year at that point was around 2.21%.
If I’m going to be stopped out, I want it to happen quickly, even the same day. I don’t want a slow bleed that ties up capital and headspace.
If you want to pressure test different mixes of win rate, average gain, and average loss, I shared a spreadsheet for practice and return simulation: deliberate practice and return simulation Google Sheet.
Trade risk: using 20-day ADR% to size stops
When I’m planning a trade, I’m always thinking about the stock’s character. Not all candles are equal, and not all stocks move the same way.
A tool I like for this is 20-day ADR percentage (average daily range as a percent, excluding gaps). It helps me sanity check my stop placement.
If a stock’s 20-day ADR is 2% and I’m using an 8% stop, that’s out of sync.
The three bar types I focus on
These show up again and again in my work:
- Trigger bars
- Shakeout demand tails
- Gap-down reversal bars
Trigger bars are usually tight, often low volume, sometimes inside bars, sitting on one or more key moving averages. They don’t have to be inside bars, but I want to see volatility contract.
Shakeout demand tails and gap-down reversal bars are naturally wider candles, so I allow a bit more room on stops.
Examples and how I think about the stop versus ADR
Here are examples I referenced and the stop logic behind them:
| Stock | Setup | Stop % (assumes perfect execution) | 20-day ADR% | What stood out to me |
|---|---|---|---|---|
| APP | Trigger bar | 2.51% | 4.95% | Stop about half ADR, tight and clean for a leader type setup. |
| KGC | Shakeout demand tail | 3.03% | 2.94% | Wider bar, stop slightly above ADR still acceptable for this bar type. |
| CCJ | Gap-down reversal bar | 3.56% | 3.02% | Wider bar, still reasonable; RS hit a 52-week high while still basing. |
With trigger bars, the best ones often let me risk about half to two-thirds of ADR. That matters because it makes “2R” moves more realistic. If the stop is half the ADR, it’s plausible the stock can move two times my risk in a single session when it breaks out.
With shakeouts and gap-down reversals, I’m more flexible. I mentioned that better setups of those types often land around two-thirds to 1.5 times ADR, because those bars are wider by nature.
A key strength signal: RS hitting 52-week highs while basing
One of the strongest signs of strength I look for is when a stock hits a 52-week high on the relative strength line while it’s still in a base.
It tells me the market might be rolling over, but this stock is still holding up. That’s real demand.
My stop-loss preferences in plain terms
This is personal, but I’m consistent about it:
- I prefer initial stops under 5%.
- If it starts with a “5,” I need a great setup in a great stock.
- Over a large sample of daily chart swing trades, I like the average loss in the 2% to 4% range, ideally closer to 2.5% to 3%.
I also adjust expectations based on the stock’s speed. High ADR names can respect the 10-day EMA. Slower, steadier names often behave better around the 21-day EMA and the 50-day moving average.
If you want tools for tracking RS and building charts, I shared my free RS line indicator for TradingView and my TradingView referral link.
Account risk: the risk trio and position sizing
Trade risk is “how far to my stop.” Account risk is “how much does this hurt if I’m wrong.”
I think about it as a trio:
- Initial stop-loss percentage
- Account equity risk percentage
- Account percentage in position (position size)
A setup might look amazing, but if the stop is 15% wide, it often fails my process right there.
Guidelines I use (stop %, account risk %, and number of positions)
These are guidelines, not laws, but they keep me grounded.
Initial stop-loss guidelines (daily chart swing trading)
| Initial stop loss | How I rate it |
|---|---|
| 1% to 2% | Very tight |
| 2% to 4% | Sweet spot |
| 4% to 6% | Hmm |
| 6% to 8% | Wide |
| Over 10% | Ridiculously wide |
Initial total account equity risk guidelines
| Account equity risk | How I rate it |
|---|---|
| Under 0.25% | Too low to move the needle (for many traders) |
| 0.25% to 0.5% | Sweet spot |
| 0.5% to 0.75% | Hmm |
| 0.75% to 1% | Pushing it |
| Over 1% | You’d better know what you’re doing |
Number of positions (active swing trading)
| Positions held | How I think about it |
|---|---|
| 1 to 2 | Extreme |
| 3 to 4 | Concentrated |
| 5 to 8 | Sweet spot |
| 9 to 12 | Sensible |
| Over 15 | Over-diversified |
I don’t treat all stocks the same
This matters.
I categorize stocks, and when the best ones set up, I’m willing to be more aggressive. I talked about TMLs (true market leaders), momentum leaders, and group or theme leaders, then ranking them tier one, tier two, tier three.
Some stocks can sit in multiple buckets. The Nvidia example came up as something that could be:
- a tier one TML,
- a tier one momentum leader,
- a tier one group or theme leader (AI).
Those are the types of stocks where I might push position size more, if the setup is right.
Position sizing examples (100k account)
These examples were built to make the math obvious.
Scenario 1
- Account size: $100,000
- Position size: 10% ($10,000)
- Share price: $100
- Stop loss: 5% ($5 risk per share)
- Shares: 100
- Dollar risk: $500
- Account equity risk: 0.5%
Scenario 2
- Account size: $100,000
- Position size: 25% ($25,000)
- Share price: $100
- Stop loss: 4% ($4 risk per share)
- Shares: 250
- Dollar risk: $1,000
- Account equity risk: 1%
Scenario 2 is concentrated, and it’s pushing account risk. That’s not automatically wrong, but it needs the right stock and the right setup.
Then I showed how tightening the stop can change everything.
If I keep the same position size but cut the stop from 5% to 2.5%, I cut the dollar risk in half. It can also let me “try it twice” for the same overall risk, if that fits my style.
Why sizing up can double returns (with the same trade outcomes)
I also walked through a 100-trade example to show why position sizing matters.
Both scenarios used the same assumptions:
- 100 trades
- 40% win rate
- average gain 16%
- average loss 4%
The only thing that changed was position size:
- 15% position sizing produced a 79% return in that example
- 25% position sizing produced a 155% return in that example
That’s a big jump, and it’s why I’m picky about where I push size. When I’m right and I’m in the right leaders, position sizing is a big part of results. When I’m wrong, it can also magnify damage, which is why the risk trio always comes first.
If you want scanning tools to help find leaders and manage lists, I shared a MarketSurge discounted trial.
Scanning tips I use for rotations and risk
I keep it simple and repeatable.
My weekly and daily rotation workflow
I scan group, theme, and sector ETFs first. I’m looking for:
- RS lines turning up after long weakness
- 52-week highs on RS lines in strong groups
- bases and continuation patterns around the 21-day EMA and 50-day moving average
- shakeout demand tails and gap-down reversals at key levels
Once I find the strongest “buckets,” I narrow down into individual leaders in those buckets. That’s where the best setups tend to stack up.
What I loved about the Uranium example (October 2021)
I mentioned uranium stocks in October 2021 as a study idea because you could see:
- tight flag and trigger bar type action
- clustering of the 10 and 21 moving averages
- volume drying up (lowest volume bar inside the base)
- breakouts across many names within one to two days
That synchronization is one of my favorite things to see. It tells me money is flowing into a theme, not just one random stock.
I stay flexible, because charts change fast
I try to avoid getting stuck in a viewpoint.
A group can look like it’s “rolling out of bed,” then print one big shakeout demand tail and flip the entire picture. When that happens, I want to be willing to do a total 180 and re-evaluate.
If you want live coaching, trade planning, and the community side of this work, I host it through my site: JackCorsellis.com membership and trading community.
Conclusion
Relative strength rotation keeps me focused on where the best odds tend to be, and risk control keeps me in the game long enough to benefit from it. I want strong groups, strong leaders, and tight, sensible stops that fit the stock’s ADR and behavior. The goal is simple, protect capital first, then press when the best opportunities show up. If you build a repeatable process around RS and the risk trio, you stop guessing, and you start planning.