We've all heard the adage, "buy low-sell high," but what about buying high and potentially selling higher?
Many traders are looking for a strong, steady stream of trade ideas, and the better the source of information, the easier it is to find potential candidates. So what’s a good way to find these ideas?
Some traders go through thousands of charts at a time or create complicated scans in order to find potential setups. And although there are many different ways to spot an idea, one of the simplest—and most overlooked—ways is to look at stocks hitting new 52-week highs.
Because the concept of buying low and selling high is so ingrained in the minds of most traders, the idea of looking for trade setups among stocks that are hitting their highs may seem counterintuitive, but it makes perfect sense.
Consider looking for the biggest movers—stocks that can move up 100%, 200%, 300% or more over time. That’s where the 52-week-highs list comes in.
Take for example a stock that is trading at $50 per share. There is no way to know if that stock will eventually get to $200 per share. But we do know that if that does happen, the stock will have to get to $75 first.
And then $100. And then $125. And then $150, and so on.
It is mathematically impossible for it to do otherwise. On that road from $50 to $200, the stock in our example will invariably appear on the new 52-week-highs list, perhaps on a regular basis.
For example, Figure 1 is a four-year chart of a stock in an up trend. On this weekly chart, you can see that once the stock hit a new 52-week high, it continued to do so.
FIGURE 1: MULTIPLE 52-WEEK HIGHS.
Image source: the TD Ameritrade thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
If you were watching the new highs list over the period, you would have seen this particular stock appear time and again. But traders who limited themselves to a buy-low, sell-high mentality would have been hard-pressed to find an entry point.
What’s important to remember about using the 52-week-highs list as a source of trade ideas is that it is just that, a source only. Just because a stock shows up on the list doesn’t mean you automatically buy it. You will still need to determine what strategy to use in order to find a point of entry.
One way to do this is to use multiple moving averages. For example, after a stock hits a new high, you could wait for it to pull back to a short- or intermediate-term moving average and try to buy it off a bounce, as long as the stock stays above its longer-term moving average.
Whatever strategy you use, the 52-week-highs list shows which stocks are demonstrating strength in the market. Stocks that are in an uptrend may continue in that uptrend, which may provide opportunities to consider.
Use Stock Screener to narrow selections based on sectors like technology. Log in at tdameritrade.com > Research & Ideas > Screeners > Stocks.
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
All investments involve risk, including loss of principal.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2023 Charles Schwab & Co. Inc. All rights reserved.