As I type this, the market is hitting 52-week highs…
I’m sure you’ve seen few headlines about it… there’s just something about new highs that gets trades excited
But there’s more to it than the buzz it creates. Market action changes and volatility tends to increase.
Because the 52-week high (and low) price level is one that large institutional trades mark on their charts. They make trading decisions based on those levels, which can increase volatility of specific stocks or entire indices as they approach and breach those levels.
Back in the day, before everyone had access to the Internet, the 52-week high/low point was known as a breakout point. Markets would tend to strongly break out or break down if they hit new highs or lows, respectively.
Eventually, traders caught on to this fact and the strategy stopped working. More and more, you’d end up with false breakouts.
As a result, the 52-week high/low breakout strategy lost its trading edge.
But that opened the door a different kind of predictable trading strategy.
A Different Way To Trade the 52 Week High/Low
After several years of monitoring how markets behave near the 52-week high/low price levels, professional traders realized more often than not markets hit the area and pulled back before breaking out with strong momentum the second time around.
To take advantage of this price action, I created a great short-term strategy that uses the 52-week high/low price points without subjecting me to the draw downs and pullbacks that occur near these price levels.
And if you’ve had a pulse over these last three weeks, you know that right now the S&P is making 52 week highs all the time… so here’s a tip to trading the strongest horses (stocks).
Here’s how to trade it…
Find Markets That Are Near Their 52-Week Highs/Lows
You want to start by finding Stocks, Futures or Forex markets that are touching the 52 week high/low price level.
These aren’t markets that are edging slowly towards the 52 week level but are gravitating toward that level with increased volatility and momentum (like this example here). The more volatility and momentum you notice near these levels, at least initially, the better.
In the example below, you will notice how the stock approaches the 52 week level like a magnet.
Monitor the Market After a False Breakout
Once the market hits the 52-week high/low level you should see an instant pullback away from that price level. The market should then take anywhere from one to three weeks to consolidate and try to break through the 52 week price high/low level again.
In this example, the stock quickly pulls back and consolidates for about 2 weeks before trying once again to breach its 52-week high.
WAIT: before you continue reading, we just spotted a stock that’s making a near identical profit pattern as the example below – look at this stock right away.
Monitor Entry Levels
As you monitor the market, note the high that was made on the day the market made the 52- week high/low initially. Your job will be to enter a limit order $0.25 cents above that initial 52 week high/low price.
You only want to enter the order for the first hour of the trading day. The breakout that should follow should be very powerful and tends to occur near the opening bell.
I rarely see breakouts that occur late in the day that have sufficient momentum to make the trade worthwhile. If you are not filled during the first hour of the trading day you should cancel your order ASAP.
You can see in this example how the stock gaps up and doesn’t turn back down. The volatility should be similar to what you saw during the first time the breakout occurred.
And in the next example, you can see the entire trade progression from beginning to end. The entry occurs $0.25 higher than the 52 week price high. In this case the gap occurred at the opening bell and we were filled substantially higher than $0.25.
This is not something you should be too concerned with because usually momentum coming from gaps near the 52 week high levels tends to follow through similar to this example.
Once you are filled you need to place your stop loss order below the low that was made the day prior to your entry.
TRAINING: After decades of backtesting and strategizing, we’ve actually pinpoint the exact price you want to set all your stop losses and profit targets. No, it’s not a “drawn in” support line, it’s a precise percentage point of the price. Here’s the formula (free)
When trading the 52 Week breakouts, you should use 15 minute bar charts the day you intend to enter the market…here’s an example of a stock nearing 52 week highs today
I always use the daily chart to isolate the pattern and make sure that it’s setting up correctly. Once the setup is correct and my order is entered I switch to the shorter time frame to make sure the pattern is developing accordingly.
My stop loss is placed a few cents below the low prior to your entry day. The market should never go back to this level if the trade is working out as planned.
And make sure you keep the trade open till the end of the day to give yourself the highest odds of achieving maximum profit potential.
I love you and you rock!
P.S. email me if you have any cool trade ideas or some wild stories to tell me! I’m always down for a good story. Also, I’d suggest that as long as these markets are on a tear, that you apply this technique that we’re about to break down and trade only the strongest S&P stocks.
This article is supplied courtesy of BookerWealth.