52 Week High Strategy

A 52-week high and low is a straightforward approach to assess the performance of a stock, commodity, or other item. The two levels are among the most closely watched by traders. Indeed, many applications, including Investing, Yahoo Finance, and Webull, will send you notifications when a stock reaches or falls below its 52-week high or low. This is a great approach to filter the stocks and focus your trades in a few firms, especially if your trading strategy is to open a few of them every day. Identifying these stocks, however, is not enough! To avoid making mistakes and destroying your trading account, it is equally critical to understand what led the stock to hit the 52-week high/low.

What is the 52 Week High Strategy?

The fundamental ideas of the 52-week strategy may be applied to any asset or market since they boil down to a simple and straightforward pricing point. It entails using the highest price point in the previous 12 months as a significant signal. The 52-week high approach entails purchasing into or buying more of a position rather than treating a price high point as a trigger to sell out of a position to lock in profits. The technique appears counter-intuitive at first, but it is predicated on the idea that the new price high indicates the possibility of greater future gains.

The 52-week high, as the name implies, is the highest market price that a stock has traded in a 52-week period – that is, one year. In other words, it is the highest price a stock has ever achieved in a single calendar year. As a result, the 52-week period is neither arbitrary nor picked at random; it represents a full year of trading. The 52-week high is based on the stock’s daily closing price, not merely the intraday high. The 52-week high is frequently regarded as a technical analysis tool that may be used to evaluate the current price of the security. It can, for example, be used to calculate the “% off the 52-week high,” which is commonly employed in stock selection. The 52-week high is also used to forecast future movements, as some consider it as an indicator of market bullishness.

52-week high strategy (moving crossover system)
52-week high strategy (moving crossover system)

Trade Entry and Exit Rules for a 52-Week Strategy

With the fundamentals established, it is evident that a group of investors is watching markets for price breakouts that might lead to more increases. Some trading systems even provide client warnings when equities break out of these highs. The key to tipping the scales in your favor is determining the best timing to initiate a trade and measures to mitigate downside risk. Because not all breakouts will be sustained, it’s a matter of identifying more winners than losers and managing those two outcomes in a way that contributes to overall earnings. In terms of trade entry points, the prior 52-week high price level that is being surpassed is the obvious entry point. Many traders look for the closing price rather than the intraday price to validate a change. Other signs can also be considered.

The greater the presence of the following at the moment of trade entry, the stronger the signal to buy:

Are the SMAs aligned?

If the 20-day simple moving average is above the 50-day moving average, and the 50-day average is above the 100-day moving average, this indicates bullish price activity. It shows that price has been steadily rising for some time, implying that it is well-positioned to continue rising once the 52-week high is breached (20D SMA > 50D SMA >100D SMA).

Trading With SMAs Alignment
Trading With SMAs Alignment

Is the stock trading above the ten-day simple moving average?

The longer-term moving averages show how long momentum has been building, but a breakout requires further impetus. If a company is trading above its ten-day moving average, it indicates that purchasing pressure is increasing. The SMA indicators in the above daily price chart are aligned to recommend buying Apple stock when it breaks the 52-week high.

52 Week High Strategy Pros & Cons

Pros

  • 52-week highs are a widely followed indication in the stock market. Historical precedents created by breakout and skyrocketing growth stocks indicate that many investors are eager for the next big thing – and willing to pull the trigger on buy trades.
  • The 52-week approach, which is coupled with relatively tight stop losses, assists new traders in overcoming the urge to sell too soon or trade against the trend.
  • The strategy is simple to implement. Market conditions and personal risk tolerance may cause investors to change which moving average they use to exit trades, but the premise of riding momentum until a certain trigger point is simple.

Cons

  • Breakouts from long-term trading ranges can be used to all asset classes, however the 52-week high method concentrates on stocks rather than other markets like FX and commodities.
  • The technique is based on placing a big enough number of trades so that the rewards on the winners outweigh the losses on the losers. If larger market conditions aren’t providing enough trade chances, a small sample size can work against the strategy’s efficacy.
  • Because the technique is skewed toward long positions, market shocks such as geopolitical events that cause the broader market to decline in value might result in a basket of 52-week high positions all triggering stop losses at the same time.

Conclusion

Whether you are a momentum investor or not, looking at a stock’s 52-week high and low prices might be informative. The approach is very popular among stock traders, but those who use it must develop a diversified portfolio to avoid single-stock danger. It can be based solely on technical signs, but some due diligence and fundamental study is also recommended.