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.
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