Technical Analysis Tuesday: How to Trade 52wk High Alerts

How do we profit from penny stocks that have just made a new 52wk high?  What are the key indicators we look for and how do we know when to exit the trade?

The new 52wk breakout trade can be one of the most profitable and low risk trades we can execute.  However, like always timing is very important.  52wk highs and lows are technical indicators.  It is important that you are well versed in Technical Analysis if you are going to trade low priced stocks.

Once you fall below the $5 share price we start to care less and less about the fundamentals of the company.  Why?  Because they are usually terrible.  That is why the stock is priced under $5 and especially if the stock is priced under $1.  Therefore we need to focus on Technical Analysis to make our trading decisions.

Technical Analysis uses charting, moving averages, and stock price information to make trading decisions.  This type of analysis has nothing to do with the fundamentals of the company like earnings or assets on the balance sheet.

Even the way the company makes money or the industry they are in matters very little, which is nice because most penny stocks don’t make money at all!

Why Does Technical Analysis Work So Well?

The answer is very simple…..because everyone is using it.  For example, if technical analysis tells us that a good time to buy a stock is after it makes a new 52wk high, then everyone will do it.  When everyone buys the stock after the new 52wk high is made the stock will go up, hence becoming a self fulfilling prophecy.

This is a key point to remember regardless of what technical signal you are watching.  Support, resistance, volume, etc are all indicators that penny stock traders are watching.  If you want to trade penny stocks effectively the most important thing to remember is that traders make stocks move.  If we know that a new 52wk high is an important technical buy signal, then we know traders will be buying the stock if it happens.

Now that we know what will happen if a technical indicator is triggered, we just have to be the first traders to act.

Penny stock trading is not about predicting what a stock will do, it is about predicting what people will do

The Best Penny Stocks to Buy: How to Find Them

We are focusing on the 52wk high trigger today, but this will apply to any technical indicators.  The best way to trade new 52wk high alerts is to be prepared and do your research the night before.  Ideally we will start the day with a watch list of 5-10 stocks that are getting close to making a new 52wk high.  It is even better if there are multiple other technical indicators in addition to a possible new 52wk high, but we will have to dig into that at another time.

Most online brokers will let you set price alerts for stocks.  The best thing to do is set price alerts for all the stocks on your watch list so that your brokerage will alert you when that price is met.

If you are running short on research time the team does a nightly stock watch list that includes 10-15 trade ideas for the next day.  It is common for this list to include stocks that are getting close to their 52wk high along with a number of other trade setups.

How to Trade the 52wk High Setup

Every stock setup is different, but generally we want to enter a trade as close to the new 52wk high price as possible.  This is for a couple reasons.

  1. We want to maximize profits.  If people beat us to the trade, that means they will likely be exiting the trade before us as well.  If too many people exit the trade before us the stock will have trouble maintaining the rally.
  2. We want to minimize potential losses.  It is possible that a stock will make a new 52wk high and then correct back under that level soon after.  We want to keep our stop losses tight with this indicator by placing them just under the 52wk high price.  A stock falling under its 52wk high is a negative Technical Analysis indicator.  The closer we are tot he 52wk high price, the smaller the distance will be between the buy price and our stop loss, hence limiting our losses as much as possible.

An Example:

Here are a great example of a stock that blew up after it made a new 52wk high.  As you can see it blasted off for 142% after making the new 52wk high.  This would have been a stock that should be added to your watch list for the next day.  The previous day closing price was just under the 52wk high.  A lot of traders who got into this play early made a lot of money today!

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