When I started in the investing business some two decades ago, one of the first things I learned about how to properly select stock winners was to look at the price action. More specifically, I was taught directly by Investor’s Business Daily founder William O’Neil that what matters most is the price action of a stock relative to the rest of the market. 

#-ad_banner-#I soon found out that measuring a stock’s relative price strength, or simply relative strength (RS), was a key filter used to identify the stocks the smart money was banking on for market-beating returns.

RS assigns a numerical score from zero to 100 to a stock based on its price performance relative to other stocks in the market over the past six months. It gives you a great sense of the strength of a stock’s past performance, and therefore, how it is likely to perform going forward.

As someone who has used RS to identify many winning companies over the years, I’m a big believer in this metric. Of course, I’m not the only one. 

According to professor Eugene Fama at the University of Chicago, relative strength was one of the three factors identified as the biggest drivers of stock prices. For his efforts, Fama was awarded the 2013 Nobel Prize in economics. In his award-winning research, Fama proved that outperforming stocks are more likely to keep moving higher than those that are underperforming.  

James P. O’Shaughnessy, author of “What Works on Wall Street,” studied 46 years of market history and concluded that stocks with strong relative strength significantly outperform the overall stock market. O’Shaughnessy discovered that using a RS-based system would have beaten the market by an annual average of nearly 3.7% over the past 83 years.

This is the kind of edge you need when investing, and as good as RS is, I think it’s been taken to another level by my colleague Malcolm T., chief strategist for Alpha Trader.

After decades of trading stocks and managing portfolios, Malcolm has come to the same conclusion that Fama, O’Shaughnessy and I have, and that is that relative strength is the most dependable way to pinpoint winning trades. 

But Malcolm doesn’t stop at RS. He combines a stock’s RS rating with a similar style rating that measures a stock’s most important fundamental metric.

The RS score, along with the proprietary score Malcolm assigns to the key fundamental metric, gives investors a one-two punch of an indicator that exponentially increases the probability of finding winning stocks.

One of the companies Malcolm identified for his Alpha Trader subscribers in late March also happened to be a stock on my watch list: Lattice Semiconductor Corp. (Nasdaq: LSCC).

Lattice makes what are called field programmable gate arrays, as well as conventional programmable logic devices. These semiconductor devices are used in myriad computing applications, and demand for them has been robust. 

After last Thursday’s close, Lattice reported first-quarter revenue rose 35.7% year over year to $96.6 million. The consensus estimate for the top line was just $91.3 million. Earnings per share (EPS) came in at $0.10, which was far better than the $0.06 analysts were anticipating. 

In response to Lattice’s upbeat results, traders sent shares surging 7.6% the next day. That move gave me the go-ahead to put LSCC on my recommended list — but if I had listened to Malcolm in late March, I would have already been up close to 8% in about four weeks before the big earnings jump.

You see, Malcolm identified LSCC as a stock with an extremely high RS rating and an extremely attractive fundamental ranking over a month ago. He calls these Alpha Trigger #1 and Alpha Trigger #2, and the highest possible combined Alpha Score a stock can receive is 200 — 100 for RS and 100 for his fundamental trigger. 

According to the Alpha Trader database, LSCC currently has a RS rank of 94 and a fundamental ranking of 89, giving it an Alpha Score of 183.

That’s off-the-charts good, and it gives me the confidence to recommend traders jump on LSCC here in anticipation of a continued run higher in the stock. 

This article was originally published at ProfitableTrading.com: 
Little-Known Indicator Signals This Under $10 Stock is an Immediate ‘Buy’

P.S. If you want to do what the pros do when identifying the strongest potential winning stock candidates, then I highly recommend checking out this Alpha Score presentation. In just six months, the Alpha Score has tagged 71 stocks right before they jumped 10% in two weeks. And it’s tagged 21 stocks right before they jumped 20%. Click here to get all the details about the Alpha Score.