In the previous two parts of this series on Trading New Highs (you can find Part 1 and Part 2 here), we saw that stocks making new highs tend to follow through and move higher. This has not only been seen by professional traders; the academic world has published the same findings.
To trade this, one can buy every 52-week high. Overall though this is not the most efficient way to trade or invest.
One can substantially improve the results of these 52-week highs by buying the stocks which right after making the high, pullback into a “buying zone”. Momentum traders will wait for these pullbacks to occur and in fact the stock chart pattern used by the CANSLIM investment style has called this setup a “Cup and Handle”, with the pullback being the Handle.
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Ideally though, we want to be as precise as possible when knowing when to buy. When one is precise one’s performance is often improved. And we see this especially with stocks which have made new highs and then have pulled back into their precise buying zones.
Since 2001, these New Highs buying zones have accurately predicted the short-term upward rise of stocks up to 76.77% of the time and done correctly within a portfolio have seen substantial positive annual returns every year for over a decade.