Last Updated on July 30, 2022 by Oddmund Groette
For many, the approach is to buy low and sell high. But that is not the case with the 52-week high trading strategy. What is the strategy?
The 52-week high strategy is a method of investing that seeks to buy stocks that are trading close to their 52-week highs because they have been shown to outperform the ones that are trading far away from their 52-week highs. The strategy goes against the intuitive “buy low and sell high” mantra.
Before we continue, let’s find out what the 52-week high means.
What is the 52-week high?
As the name suggests, the 52-week high is the highest market price that a stock has traded over a 52-week period — that is, one year. In other words, it is the highest price a stock has reached in one full year. So, the 52-week period is not arbitrary or chosen out of convenience; it represents a full-year trading period. The 52-week high is based on the daily closing price for the stock, not just the intraday high price.
The 52-week high is often considered a technical analysis tool, which can be used to analyze the current price of the security. For example, it can be used to find the “percentage off the 52-week high”, which many use in stock selection. The 52-week high is also used to predict future movements as well, as some see it as an indication of bullish sentiment in the market.
What does a 52-week range mean?
A 52-week range is the price range over the last 52-weeks. It is the range between the 52-week high and the 52-week low. So, the upper boundary of the range is the 52-week high, and it serves as a resistance level. In the same way, the 52-week low is the lower boundary of the range and serves as a support level.
Since the 52-week high/low is based on the daily closing price of the stock, the price may, on many occasions, actually breach a 52-week high intraday but end up closing below the 52-week high. Such intraday breaches are not recognized, so the current range stays intact. The same also applies when the price breaches the 52-week low intraday but fails to close at a new 52-week low. In these cases, the failure to close above/below the 52-week high/low after breaching the levels intraday has a very significant implication, especially for short-term traders.
Some traders and investors use the 52-week high/low range as a technical analysis tool. They consider the high/low figures as an important factor in the analysis of a stock’s current value and as a predictor of its future price movement. For example, an investor may show increased interest in a particular stock when its price nears either the high or the low end of its 52-week price range. They may buy a stock when the price exceeds its 52-week high, or sell when the price falls below its 52-week low.
The explanation is that if a price breaks out above or below its 52-week range, there must be some factor that generated enough momentum to continue the price movement in the same direction. Often the trading volume of a given stock spikes when the price breaks above or below the 52-week range.
How to calculate the 52-week high
The 52-week high is not calculated like a mathematical indicator. Instead, you can trace it on the stock’s daily price chart — the highest closing price over the past 52 weeks. However, it can be used to get the Price vs. 52-Week High indicator, which compares the current price to the highest price at which the stock has traded in the last 52 weeks. The indicator calculates the current price’s “percentage off the 52-week high. The formula is given as follows:
(Current Price – 52-week High) / 52 Week High
It gives investors an idea of how much the stock has moved in the last year and whether it is trading near the top, middle, or bottom of the range.
For example, if a stock that has closed as high as $10 is currently trading at $9. Its percentage off the 52-week high is (9—10)/10 = -0.1 or -10%. This means that the stock is trading 10% below its 52-week high.
How do you find 52-week high and low?
The 52-week high and low are determined as the highest and lowest closing prices of the security within the last 52 weeks. So, to find the 52-week high and low of any stock, open the stock’s price chart and trace the last 52 weeks. Then, check the highest closing price and the lowest closing price the stock has had over that period.
Since the 52-week high/low is based on the daily closing price, there would be occasions when the price of the stock may very well fluctuate above the 52-week high over the course of a day’s trading session, but if the price does not close above, it is not regarded as having hit a new 52-week high. The same applies when the stock trades lower than the 52-week low during a trading session but fails to close below it to create a new 52-week low.
In today’s world, you don’t even need to check the stock chart to find the 52-week high and low of any stock. Simply check the website of any financial journal or platform, such as Bloomberg, Wall Street Journal, or Yahoo Finance.
The 52-week high effect on stocks
Some academic studies have shown that there is a “52-week high effect” in stocks. The effect is that stocks with prices close to the 52-week highs tend to have better subsequent returns than stocks with prices far from the 52-week highs.
One of the reasons for the 52-week high effect is that investors use the 52-week high as a reference point when valuing stocks — when stock prices are near the 52-week high, investors are unwilling to bid the price all the way to the fundamental value. In essence, investors under-react when stock prices approach the 52-week high, so such stocks tend to stay undervalued, which creates the 52-week high effect.