Justin is an active trader with more than 20-years of industry experience. He has worked at big banks and hedge funds including Citigroup, D. E. Shaw and Millennium Capital Management.
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:
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.
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.
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.
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.
In less than 12 months, investors who applied the 52-week breakout strategy had more than doubled their money.
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.
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:
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).
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.
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.
Both exit points 1 and 2 would have been opportunities to lock in some gains and avoid the subsequent sell-off.
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.
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.
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.
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