52-Week High Trading Strategy — What Is It? (Backtest)
Last Updated on October 24, 2022
For many, the approach is to buy low and sell high. But that is not the case with the 52-week high trading strategy – you do the opposite. What is the 52-week high trading 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.
In this article, we look at both backtests of individual stocks and the main index (S&P 500).
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.
The best strategies can be found in our….
Backtested trading strategies
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 individual stocks (backtests)
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.
To our knowledge, there are plenty research that concludes that stocks at or close to 52 week high outperform the market. One of these studies was made by Hong, Jordan, and Liu called Industry Information and the 52-Week High Effect. We quote their conclusion:
A strategy that buys stocks in industries in which stock prices are close to 52-week highs and shorts stocks in industries in which stock prices are far from 52-week highs generates a monthly return of 0.60% from 1963 to 2009, roughly 50% higher than the profit from the individual 52-week high strategy in the same period. The 52-week high strategy works best among stocks with high R-squares and high industry betas (i.e., stocks whose values are more affected by industry factors and less affected by firm-specific information). Furthermore, our industry 52-week high effect is more pronounced among firms with less informative prices, exactly the type of firm on which investors are more likely to suffer from the anchoring bias. Our results hold even after controlling for both individual and industry return momentum effects.
The 52-week high effect on individual stocks – backtest one
We came across another backtest done at enlightenedstocktrading dot com in a post called Should you trade with a stocks 52 week highs or lows?
This means that buying new 52 week lows is likely to be a losing strategy and shorting new 52 week highs is also likely to be a losing strategy because the entry signals have a negative expected profit. Momentum (trends) are a powerful force in finance, and trading in the direction of the trend is clearly beneficial, especially on the long side as the edge is much more significant for rising stocks than for falling stocks.
We summarize the results in this table:
|Exit after 5 days||Exit after 10 days||Exit after 50 days||Exit after 100 days|
|Buy new 52-week highs||-0.40%||-0.20%||1.10%||2.20%|
|Buy new 52-week lows||-1.00%||-1.70%||-2.40%||-3.20%|
|Short new 52-week highs||-0.60%||-0.80%||-2.40%||-3.50%|
|Short new 52-week lows||0.10%||0.40%||0.80%||0.50%|
The table shows that neither short nor long is any good in the short term. Does it get any better if we use a different exit? Yes, it turns out the strategy can be improved upon. The above-mentioned website backtested stocks that sets new 52-week high and used the following three exit criteria:
- Hold until the stock crosses below the 200-day moving average.
- Hold until the stock closes below a 25% trailing stop loss.
- Hold until the stock makes a new 100-bar lowest close.
The results are summarized in this table:
|Entry signal||Exit signal||CAGR %||Max drawdown|
|Buy new 52-week highs||Exit 1||8.60%||44.00%|
|Buy new 52-week highs||Exit 2||6.80%||39.00%|
|Buy new 52-week highs||Exit 3||7.20%||47.00%|
The results are in line with a buy and hold strategy of the main stock indices, but not exactly terrible exciting results. However, the results clearly establish that you need some time to make the 52-week high stocks have to time to run.
The 52-week high effect on individual stocks – backtest two
Another backtest was done by an Australian website called The Chartist. In an article called Testing a Momentum Strategy with a 52-Week High he backtested a strategy that backtested the following criteria:
- Calculate the distance from the 52-week high and rank strongest to weakest.
- Buy the top 10 stocks with an equal 10% allocation of capital.
- The S&P 500 must be above its 200-day moving average.
- The stock must be above its 100-day moving average.
- Repeat monthly, i.e. sell any stocks that fall out of the top 10 and replace them with new ones.
The above strategy has handily beat the S&P 500 over the last 2 decades!
52-week high trading strategy on the stock index (backtest)
Let’s go on to backtest a 52-week high trading strategy. We look at how the 52-week high indicator predicts future returns in S&P 500. We use the oldest ETF still trading as a proxy for S&P 500: SPY.
52-week high strategy no 1 (backtest)
The first backtest is pretty simple and reads like this in plain English:
- Calculate a 200-day moving average and a 50-day moving average of the 52-week high indicator.
- When the 50-day moving average crosses above the 200-day moving average, we go long SPY at the close.
- When the 200-day moving average crosses above the 50-day moving average, we sell SPY at the close.
The trading rules are the opposite of the Death Cross and use a moving average crossover strategy.
The equity curve of the strategy looks like this (what is a good equity curve?):
You don’t need much trading experience to discover that is not a very tradable trading strategy.
If we flip the rules it doesn’t get much better either.
Let’s go to strategy backtest number 2:
52-week high strategy no 2 (backtest)
The strategy is like this in plain English:
- The 52-week high reading sets a new 10-day high and we go long at the close.
- We sell when the 52-week high reading sets a 10-day low.
This simple strategy returns this equity curve:
Again, we clearly see that this is not a strategy worth spending more time on, and we rather recommend looking for a profitable trading strategy among our other strategies (which there are many, also in our shop).
Amibroker code for 52-week high strategy backtest (and over a hundred other trading ideas)
We have made the Amibroker code (and the 52-week high strategy in plain English) available for you for a small fee:
52-week high strategy with backtest – ending remarks
Academic research states that those stocks that are close to the 52-week high perform better than those further away. The research is based on individual stocks, but in this post, we only looked at the market average (S&P 500). The S&P 500 is market-weighted and thus it’s heavily tilted towards the biggest stocks. Because of this, we suspect we were not able to replicate any particularly good 52-week high strategy.