Buy low and sell high? That won’t strictly be the case if you’re following the 52-week high trading strategy. The approach followed by many seasoned pros is to look for assets breaking out of historical patterns and forming new ones. Take growth stocks, for example, where super-sized returns can be made from holding your nerve and resisting the temptation to sell too early and where the 52-week strategy provides the buy signal.
The 52-week high strategy goes against the intuitive approach of many novice traders, which makes it worthwhile exploring if only to develop a more disciplined and hopefully profitable trading psychology. It also stands out from other technical analysis tools in being more about where price might go rather than where it’s been.
In this article, we'll use real-life trade examples to look through:
- 52-Week Strategies Explained
- 52-Week Strategy – Trade Entry & Exit Rules
- 52-Week Strategy – Stop Losses
- Advantages of Using 52-Week Trading Strategies
- Disadvantages of Using 52-Week Trading Strategies
- Other Strategies That Work Well With 52-Week Indicators
- The Bottom Line
52-Week Strategies Explained
The basic principles of the 52-week strategy can be applied to any asset or market as they come down to a simple and easy to access price point. It involves taking the high price point over the last 12 months as a key indicator. Rather than treating a price high point as a trigger to sell out of a position to lock in profits, the 52-week high strategy involves buying into or buying more of a position. The strategy is at first counter-intuitive but is based on the fact that the new price high signifies the potential for further future gains.
Apple Inc Shares – Weekly Price Chart – 52 Week Trading Strategy
Source: IG
The above price chart for the market-darling Apple Inc demonstrates how the strategy can be applied. Arrow A marks the price for Apple in October 2018, being in the region of $56. The stock trades sideways, or more importantly, below that price level for 52 weeks before, in October 2019, it breaks above the level.
Apple Inc Shares – Weekly Price Chart – 52 Week Trading Strategy
Source: IG
Anyone who bought at arrow C or D may lock in a profit. Their pullback strategy having paid off – but flipping things around and taking a longer-term view, arrow B can be seen as a trigger to buy, not sell.
Apple Inc Shares – Weekly Price Chart – 52 Week Trading Strategy
Source: IG
Experienced traders treat the breakout above a 52 week high to be a game-changing event. At that point, past performance is still factored in but becomes secondary to what could lie ahead.
In the Apple Inc example, there is an onward share price surge after arrow B. Interestingly, from a risk management perspective, the pullback to arrow E sees price action retreat towards the 52-week high trade entry point but not touching it. As is often the way with technical indicators, what was once a resistance level turned into a support level.
Apple Inc Shares – Weekly Price Chart – 52 Week Trading Strategy
Source: IG
In less than 12 months, investors who applied the 52-week breakout strategy had more than doubled their money.
Variations of the 52-Week Strategy
- With markets being neutral in terms of upwards or downwards bias, the same principles can be applied to 52-week lows.
- If your stock is not a ground-breaking growth stock, then sideways price movement within a range of the 52-week high and low could be more likely.
- When the price reaches the 52-week high resistance level, there can be significant resistance to it breaking through. With stocks, in particular, some investors wait for the closing price to be above the 52-week high closing price. This filters out false indicators caused by price temporarily moving higher during intra-day trading.
52-Week Strategy – Trade Entry and Exit Rules & Stop Losses
With the basics established, it's clear that a group of investors monitor markets looking for price breakouts that might lead to further gains. Some broker platforms even offer client alerts relating to stocks that are breaking out of these highs. Finding the optimal time to enter a trade and ways to manage downside risk is the secret to tilting the balance in your favour. Not all of the breakouts will be sustained, so it's a case of picking more winners than losers and managing those two outcomes in a way that helps build aggregate profits.
Trade Entry Points
In terms of trade entry points, the obvious entry point is the previous 52-week high price level which is being breached. As mentioned, many look for closing price rather than an intraday price to confirm the move. Other indicators can be factored in as well. The more of the below that is in place at the time of trade entry, the stronger the signal to buy:
Are SMA Simple Moving Averages aligned?
If the 20-day SMA is above the 50-day moving average, and the 50-day average is in turn above the 100-day moving average, then this is a sign of bullish price action. It demonstrates price has been moving upwards in an orderly manner for some time which suggests it's well-positioned to continue its move once the 52-week high is breached. (20D SMA > 50D SMA >100D SMA).
Apple Inc Shares – Daily Price Chart – 52 Week Trading Strategy – Trade Entry Points
Source: IG
Is the stock trading above the ten-day SMA?
The longer-dated SMAs indicate how long momentum has been building, but a breakout requires renewed impetus. If a stock is trading above the average price of the last ten days, then buying pressure is building.
In the above daily price chart, the SMA indicators are aligned to support buying Apple stock as it breaks the 52-week high.
Trade Exit Points
As the 52-week trading strategy is based on momentum, the SMA's again become a key indicator of when to exit positions. In the example of Apple, there are two moments when price falls below the daily 20 SMA. The first exit point would have locked in some profits, but there is room for FOMO to kick in as price quickly recovered and pushed on higher.
The second SMA triggered exit point would have represented a much closer to an optimal exit point. Price cuts through the 20 SMA on the 30th of January 2020 at $77.76 per share, and by the 23rd of March, price has fallen to $57 per share – a 25.77% fall in value.
Apple Inc Shares – Daily Price Chart – 52 Week Trading Strategy – Trade Exit Points
Source: IG
Both exit points 1 and 2 would have been opportunities to lock in some gains and avoid the subsequent sell-off.
52-Week Strategy – Stop Losses
The obvious place for stop losses is just below the 52-week high price level. This is based on the one-time resistance level turning into a significant support level once breached.
Other options include setting stop losses below the 20, 50 and 100 SMAs. Momentum is the fundamental principle in play, so moving averages make an obvious choice in terms of risk management.
Using trailing stop losses is also an option. As price moves higher, stop losses set below the 10-day SMA would provide an automated exit point meaning the trade could be left to run.
One note to make is that 52 week high strategies offer a lot of potential upside and relatively little downside. The ability to set a tight stop loss and let winners run means that if 50% of the trades are successful, then aggregate returns should be positive – the sum of returns from winners being greater than the sum of losses on losing trades.
Stop Losses and Take Profits in 52-Week High Strategies
- Set your protective Stop Loss below the 52-week high, which formed the trade entry point.
- Trailing stop losses used to set exit point and applied using SMAs, particularly the 20 Day SMA.
ADVANTAGES OF USING 52-WEEK TRADING STRATEGIES
- 52-week highs are strong indicators because they are based on long-term trends. They are regarded as strong indicators of resistance and support.
- In the stock markets, in particular, 52-week highs are a much-watched indicator. Historical precedents set by growth stocks that broke out and sky-rocketed means many investors are looking for the next big thing – and willing to pull the trigger on buy trades.
- Technical indicators, in general, are limited by the fact that they are lagging indicators. By definition, they are based on previous price activity. 52 Week strategies are not immune from this criticism, but they stand out as providing a clear indication of where price is heading, not just where it has been.
- Systematic trend following strategies account for an increasing amount of trading activity. The 52-week high trading strategy is a popular target for big algo-based hedge funds, which means there is potential for a lot of cash getting behind a trade.
- Discipline is a critical element of successful trading. The 52-week strategy helps novice traders get past the temptation to sell too early or trade against the trend and is associated with relative tight stop losses.
- There are certain times of the year when the strategy will become more relevant. US earnings season is a quarterly event where firms can provide updates on their business, a catalyst for an upside breakout. Having that period set in the calendar can help busy investors plan when they need to be active.
- The strategy is easy to follow. Market conditions and personal risk appetite might lead to investors adjusting which moving average they use to exit trades, but the principles of riding momentum until a specific trigger point is a straightforward one.
- Good brokers support the strategy by providing built-in 52 week high indicators. This can take some of the leg work out of the analysis needed to spot them.
- If you make the right call on an upward breakout, you'll be trading with market momentum, and when that happens, the gains can be substantial.
DISADVANTAGES OF USING 52-WEEK TRADING STRATEGIES
- Breakouts of long-term trading ranges can be applied to all asset groups, but the 52-week high strategy focuses more on stocks than other markets such as forex and commodities.
- 52-week highs are not easily applied to other metrics such as RSI. They can be used, but as they typically focus on price, only a few participants will be trading off breakouts from other indicators. As a result, there will not be the same groundswell of support for a price based on non-price data.
- The strategy works on the basis that a large enough number of trades are placed so that the returns on the winners outweigh the losses on the losers. A small sample size can work against the strategy's effectiveness if broader market conditions aren't generating enough trade opportunities.
- The strategy can be applied to short positions, but there is more interest in breakouts to the upside. As the strategy is therefore biased to long positions, market shocks such as geopolitical events, which cause the broader market to fall in value, can lead to a basket of 52 -week high positions triggering stop losses all at once.
- While technical analysis, namely price action, is at the heart of the strategy, fundamental factors need to be considered. It can take time to keep up with news and analysis of stocks, and if you're building a sizeable portfolio, that extra commitment needs to be considered.
- There is a range of common problems that explain why technical indicators fail.
- ‘The trend is your friend until the bend at the end'. Even winning trades need careful management and constant appraisal of potential exit points.
Other Strategies That Work Well With 52-Week Indicators
Time zones
52-week strategies are great at providing a clear indicator of a potential break out, but all indicators benefit from being used in conjunction with others. Whatever your trading style, incorporating signals from the below strategies can improve trading performance.
It is also worth questioning the chosen time frame. The 52-week high is the go-to metric representing a calendar year but applying different time frames is another option. Popular other timeframes include one month and one week, and day traders even use the one-day window to spot trading opportunities.
The Bottom Line
Successful momentum trading is based on spotting the direction in which the majority of the market is heading, and the 52-week high strategy is a relatively reliable indicator of such moves. Nothing is guaranteed, and false breakouts occur, but trade management techniques such as tight stop losses and letting winners run can skew the odds in favour of the strategy.
The strategy is particularly popular among stock traders, but those using it need to build a diversified portfolio to average out returns to avoid single-stock risk. It can be based purely on technical indicators, but some due diligence and analysis of fundamentals are also recommended.
If a 52-week high trading opportunity does arise, then one benefit is that the trade entry, trade exit and stop-loss levels are easy to spot and apply. Whether you're using a demo or a live account, incorporating 52 weeks into your analysis is an ideal way to start picking up on the mood and direction of the market.
Further Reading
- Head here to find out more about four of the best breakout stocks to buy now.
- Read this article to develop your ability to trade market momentum using Elliot Wave Theory.
- Another indicator to apply to the strategy uses swing lows.
- If you need to fill in some gaps in your analysis, head here to find out about other indicators used to spot trends.
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